What is IR35?
IR35 is a tax anti avoidance rule, designed to tackle disguised employment. Disguised employment is when an organisation engages an individual contractor to provide services using an intermediary, usually a limited company. This shields the organisation from the liabilities attached to employment, from a tax point of view.
IR35 is also known as the off-payroll reforms.
What is changing and when?
Commencing 6th April 2021, the end user (the organisation) must decide the status of contractors, freelancers and consultants for tax purposes. If contractors are assessed and viewed as “deemed workers” i.e they fall inside of IR35, they can no longer be paid “off payroll”. Rather then their invoice being processed via accounts payable, they will be paid via payroll after tax and NI is deducted.
Previously, it was the responsibility of the contractor to assess their tax status, but this burden will now fall on the organisation.
Does this mean contractors who fall within IR35 have full employment rights?
No, this is a tax and NI matter. Being deemed inside IR35 does not grant a contractor employment rights or protection.
What do I need to do differently when engaging contractors?
During the process of engaging and negotiating with a contractor, you should conduct a Status Determination Assessment (SDS). A SDS will decide if they have deemed employment status or not. Following the introduction of IR35, contractors with deemed employment status are to be paid net of tax and NI via payroll.
It is likely that the assessment process and contractors wanting to renegotiate their rates (if they fall inside IR35) will cause delay in the procurement of contractors.
Status Determination Statements must be provided to all contractors with deemed employment status. It is best practice to provide a copy to contractors who fall outside of IR35 also.
Contactors should be given the right to appeal the decision of their assessment.
Organisations should reassess contractors regularly, especially after significant changes to the working relationship.
Will all of my contractors have deemed employment status?
To be sure, you should conduct an assessment for all contractors.
In general, if an individual is providing a personal service, such as an interim Operations Director, they are likely to be inside IR35. If they are providing a service, such as a training programme which could be delivered by anyone, they are likely to be outside of IR35.
Will IR35 effect my organisation?
IR35 has been in place within the public sector since April 2017.
The changes coming into effect this April are to medium and large employers, not small businesses.
You are deemed a small business if 2 out of these 3 are true for last two successive financial years
• Turnover not more than £10.2million
• Balance sheet not more than £5.1million
• total amounts shown as assets in the company’s balance sheet before deducting any liabilities
• Average number of employees in a year (not including contractors) not more than 50
What steps should I follow to prepare for IR35?
- Audit
Look at accounts payable data and speak to the leadership team to identify those providing a personal service provision.
2. Assess
Gather contracts and conduct a Status Determination Assessment for each contractor. Assessments should be done in partnership with the contractor, hopefully avoiding appeals.
Agree at this point the working practices which will be followed, so not to inadvertently change IR35 status.
3. Confirm
Issue Status Determination Statements and handle appeals (if any).
Keep central control of records including assessments, statements and appeals.
4. Payroll
Add to payroll, using the standard official starter checklist. Be mindful of payment terms, you may need to run multiple payrolls in some cases to meet payment terms.
Any finally…
This is a very significant change of legislation requiring a collaborative approach across the organisation. Ensure your organisation is engaged in this change. Failure to manage this well can be very costly and can include transfer of all liabilities, penalties and interest. Feel free to contact a member of the ViewHR Team to discuss the above.
