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Large and medium-sized businesses now just have a couple of months left to prepare for the changes to the off-payroll working rules (IR35).
From 6 April 2021, in most cases, the engager (employer) will be responsible for deciding IR35. If caught inside IR35, then the engager must deduct tax and National Insurance Contribution (NICs) from freelancers and contractors, operating via a Personal Service Company (PSC), as if they were employees.
The new IR35 rules do not affect small businesses, as defined by the Companies Act 2006, where they meet two or more of these criteria:
- Annual turnover is no more than £10.2 million;
- A total of fixed and current assets (before deducting current liabilities, long-term liabilities and deferred tax provisions) over £5.1 million; or
- No more than 50 employees.
When a business grows from a small to a medium or large-sized business, there is a two-year transition period before the IR35 regulations apply.
Undertaking IR35 determination
Engagers are required to undertake this IR35 determination for every contract they agree with a worker. The official guidelines are as follows:
- Pass your determination and your reasons to the worker and the person or organisation you contract with
- Make sure you keep detailed records of your employment status determinations, including the reasons for the decision and fees paid
- Have processes in place to deal with any disagreements that arise from your decision.
The Government has created an assessment tool, CEST which assesses whether the engagement is classed as employment or self-employment. A report can be printed out as a record of your assessment if challenged by HMRC.
If the determination results in a contractor being within the IR35 rules, you will need to deduct and pay tax and National Insurance contributions to HM Revenue & Customs via PAYE.
Where an employer fails to correctly identify a disguised employment scheme, the worker’s tax and National Insurance Contributions (NICs) become their responsibility.
Where you hire a contractor via an agency it is the responsibility of the closest intermediary to the PSC to calculate, deduct and pay tax and NICs via PAYE on the contractor’s remuneration.
It is estimated that almost a quarter of the UK’s workforce now works on a contingent basis, either in the public or private sector, and so businesses must be prepared for the changes ahead.
Here are some basic steps that all businesses can take to help them prepare:
Conduct an IR35 audit of freelancers and contractors
As it will be the responsibility of the person engaging the services of a contractor to determine whether their work falls inside the new rules, you should carry out an audit of all employees and contractors currently working within your business to determine who may be affected.
Determine who falls under the IR35 rules
Last year, many businesses were considering a blanket approach to freelancers. However, recent research suggests that more companies are taking a measured approach to ensure they aren’t disadvantaging contractors. You will need to determine whether each contractor falls “inside” or “outside” of the new rules.
You may face serious repercussion for failing to demonstrate reasonable care when classifying roles for employment tax purposes. Assess each engagement on a case-by-case basis.
Engagers who fail to determine the IR35 status correctly will be held liable for any tax or NICs and could face penalties.
Communicate all changes
Once you have determined whether a person falls within the rules or not you should communicate any changes to them. It is important to demonstrate that you are taking reasonable care to assess their status.
If you determine that a person should be within the new rules and you switch them to the PAYE system, as required, they could see their take-home pay reduced considerably. You should take the time to discuss these changes with them.
Should you disagree with the determination, the Government has a procedure for all parties involved to use.
Create an agreement policy
Businesses should prepare an agreement policy for any new contractors they take on from April 2021, which clearly outlines the contractor’s employment status.
Existing contractors might also need their agreements adjusted in light of the IR35 changes if they run into the new financial year.
Consider the costs
Many contractors have indicated that they intend to increase their daily or hourly rate to compensate for income tax and NICs deductions by employers.
Discuss this with contractors as soon as possible to factor any additional costs into your employment budget.
If you rely on the services of contractors or freelancers, you must prepare your payroll systems and process for the IR35 changes. If you have any questions, then please get in touch with Tim Cook.
