There’s been discussion and moves to push through IR35 reforms for quite some time, and the latest round had been planned for April 2020. Obviously COVID-19 changed HMRC’s priorities and the original date was scrapped. Despite criticism and a 67-page report from the House of Lords describing the reforms as unfair on contractors and burdensome for businesses, no extension was granted.
The latest changes are due to come into effect in April 2021 and don’t look likely to be stopped before then. The changes have been delayed by a year so they’re nothing new. But with the effects of COVID-19 likely to be felt for a while to come, and the prospect of a no deal Brexit, it’s another thing to add to current business concerns.
Make sure you know how you might be affected and what you can do to prepare. Below, we’ll answer the following questions:
- What’s changing with IR35?
- Will private sector businesses be affected by IR35?
- How do I know if a contractor falls under IR35?
- How should I prepare my business for IR35 changes?
What’s changing with IR35?
IR35 was introduced in 2000 in order to combat tax avoidance amongst freelancers and contractors. Currently public sector businesses must determine whether a freelance contractor they pay falls under IR35 or not – and if they do, they must make National Insurance contributions for them. Essentially, what’s happening now is that all businesses will have to determine the employment status of any off-payroll workers they contract. The latest amendment is set to bring in around £1.3 billion for the Treasury.
So from April 2021, as an employer you’ll need to decide whether you should pay the relevant National Insurance rather than the contractor themselves. You’ll need to make a Status Determination Statement (SDS) for every contract you agree with an agency or worker. Not taking reasonable care with this determination will mean the worker’s tax and NI contributions become your responsibility.
Businesses in the private sector that are affected by these rules will therefore need to make sure they have a robust system in place to manage contractors who aren’t treated as employees for PAYE and NIC purposes. If you rely on contractors as a way to reduce employment costs and related liabilities like sick pay, or if that’s just the nature of your business, you’ll need to make the extra effort to be HMRC compliant.
Will private sector businesses be affected?
Not every business needs to worry about these changes just yet. When the new rules come into effect next year, they’ll only apply to private sector companies that meet two of more of the following conditions:
- having an annual turnover above £10.2 million
- the balance sheet total is over £5.1 million (your assets before deducting liabilities)
- having more than 50 employees
However, if you’re connected or associated to a parent company that does fit the above criteria then you’ll have to apply the off-payroll working rules for any contractor you hire, even if your business wouldn’t otherwise qualify. The rules won’t apply, regardless of turnover, if your business is either unregistered, an LLP, or based entirely overseas.
If your business doesn’t fall into these categories then you won’t need to decide the employment status of your workers. It’ll still be down to the contractor’s intermediary (a limited company, usually). They may need to ask you to confirm your size before they begin work, which you’ll have to do. Other than that, there’s no change just yet.
How do I know if a contractor falls under IR35?
IR35 applies to freelancers and contractors who don’t fall under the HMRC definition of ‘self-employed’. The point of IR35 on the surface is to avoid encouraging businesses that use contractors as employees in all but name. This can vary between businesses and depending on projects, but HMRC will look at all the work a contractor or freelancer does for you throughout the relationship.
You can use HMRC’s tool to check someone’s employment status for tax purposes. It allows you to determine whether off-payroll working rules (IR35) apply to a particular contractor, and if the work they do for you is classed as employment. This will inform your SDS and should be relatively straightforward.
Essentially, you need to work out your employment relationship with anyone who provides work for you off-payroll. Start by asking yourself:
- Is the contractor able to send a substitute for their work or do they do it all personally?
- Does the contractor have to carry out any work you request?
- Do you control where, when and how the work is done?
Answering yes to these questions would suggest that the contractor in question is closer to an employee of your business. By contracting them, they won’t be paying the same taxes as they would if they were an employee of yours (and also won’t have the same benefits such as sick pay and holiday entitlement).
How can I prepare my business for IR35 changes?
For many businesses that are currently strapped of cash and resources, having to channel their focus onto this may not feel like a priority. However, there’s less than a year until these changes come into effect, so make sure you start planning as soon as possible so you’re not caught out.
The main reason for these changes is to crack down on off-payroll tax avoidance. Working as a contractor is often more tax efficient than being an employee as individuals are able to reduce their NIC and reduce or defer income tax (if they set up a company through which to be employed). The benefits are clearly attractive. The government sees this as an unfair advantage as many contractors essentially operate as employees while gaining a tax benefit over other people doing similar work.
If you’re a medium or large private sector business, you’ll need to put systems in place to make sure your hiring processes and payroll are compliant. You’ll need to check the tax status of all external contractors and freelancers yourself, so make sure you have the personnel and capacity to do this.
If you do rely on contractors, you’ll need to be able to ensure that all contractual terms and working practices reflect proper business-to-business agreements. Start working off the basis that the private sector IR35 reforms will be introduced next year (and start as soon as possible).