Off-payroll working from April 2021

IR35 rules have now changed, which will affect off-payroll appointments in the private sector.

The new rules, which are commonly known as IR35, will affect businesses who engage workers through an intermediary. An intermediary can be a partnership, an LLP or single person limited company but the most common example is a personal service company.

IR35 was introduced to assess whether contractors are, in fact, employees when they take on work for their clients. The rules were introduced to ensure that income tax and national insurance payments were made, as if the workers were just normal employees. However, IR35 has been a constant issue, with many struggling to understand the rules, and HMRC struggling to fight cases successfully.

The new rules only apply to medium and large businesses.  The regulations for small businesses remain unaffected and the rules for applying IR35 will remain with the intermediary.

A medium or large business or company is defined by the companies act 2006 and will apply to companies, LLP’s, unregistered companies and overseas companies.

A business is medium or large if it satisfies two or more of the following conditions

– Turnover more than £10.2m

– Balance sheet total of more than £5.1m

– An average of more than 50 employees

Businesses not classed as small who engage with intermediaries will now need to consider the new rules.

How businesses should prepare:

– Conduct a review of your contractors – review all contracts that you have in place with workers and agencies – it is your responsibility to decide on how to treat your workers, and you will face risk of a HMRC assessment should the incorrect decision be made.

– Determine which contractors fall ‘inside’ or ‘outside’ the rules – assess contractors on a case-by-case basis. Consider making use of the Government’s Check Employment Status for Tax (CEST) tool.

– Communicate your findings with your contractors – keep in touch with contractors, have an open conversation about your decision on their status, reassure them and understand the impact on them and the questions they may have.

– Have a clear agreement in place – any new contractors which you work with from April will need a new policy, which should include their employment status.  You will need to confirm your decision on their status by issuing a Status Determination Summary to the entity making the payment.

– Dispute Policy – it is entirely possible that the contractors may dispute your decision and they have the right to do so.  You need to have a dispute policy in place and respond to any challenges within 45 days of the status being disputed.

– Prepare for higher costs – many contractors may increase their prices to compensate for the tax implications, so prepare and plan for this increase.

– Put those that are ‘inside’ the rules onto your HR and payroll system – you’ll need to put those contractors that are ‘inside’ the rules onto your payroll system, marking them as an off-payroll worker. The net amount invoiced (i.e. excluding VAT) will be treated as gross salary, and you will need to deduct PAYE and National Insurance contributions. It will then be your responsibility to pay these over to HMRC. If the contractor operates through an agency, then it’s the agency’s responsibility to deduct tax and inform HMRC.

Although HMRC has confirmed they will not be enforcing any fines for the first 12 months, it is important for businesses to demonstrate that they have made efforts to comply with the legislation or face the risk of penalties.

As these reforms are now imminent, it’s crucial for both contractors and companies that may be affected by this change of legislation, to get everything in order as soon as possible.

Get in touch

If you have any questions regarding the IR35 changes, please contact Julie Walsh on the details below.

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Julie Walsh
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