IR35 refers to the UK’s legislation aimed at taxing ‘disguised’ employment at a rate similar to standard employment. Rules and reform around IR35 and off-payroll working are changing, and from April 2021, new tax changes will come into force for the private sector. This article discusses what the IR35 is, how it is changing, how it may affect you, and how you can prepare.
Definition of IR35
The UK’s IR35 is a tax rule and off-payroll working legislation that ensures that contractors pay the same Tax and National Insurance contributions as an equivalent employee.
What are the IR35 tax changes?
Following the 2021 Budget announcement, The Chancellor confirmed that the new IR35 rules would come into effect from the 6th of April 2021, representing the most significant change to employment tax for decades. From this date, all private sector companies employing off-payroll staff (contractors) may have to take them on as an employee. The changes are all about making sure you have consistency in how you treat employees. Under the reforms, the responsibility for assessing whether IR35 applies will move from the contractor/PSC to the end-user.
From the 6th of April 2021
• All public sector authorities and medium and large-sized private sector clients will be responsible for deciding if the rules apply.
• If a worker provides services to a small client in the private sector, the worker’s intermediary will remain responsible for deciding the worker’s employment status and if the rules apply.
Who is affected by the IR35 tax changes?
Due to the IR35 tax changes, companies’ private sector, some self-employed workers and the businesses that hire them will have to pay tax differently. The changes are targeted at companies who engage contractors through a Personal Service Company (PSC).
As well as companies that work with contractors, the IR35 reforms can apply to workers who provide services to a company through their own limited company or another type of intermediary such as:
• a partnership
• a personal service company
• an individual
In the private sector, three main groups are likely to be affected by the IR35 rollout:
• Individuals who are supplying services through an intermediary
• Medium and large private-sector organisations (with 50 or more employees
• Recruitment agencies and other intermediaries which supply staff
To clarify, the company receiving the service is responsible for determining if the changes apply to them, rather than the worker providing the service. If in doubt, check HMRC’s Check Employment Status for Tax (CEST) online tool, designed to assess whether a contractor would be an employee for tax purposes if they were hired directly.
When are the next steps?
From the 6th of April 2021, companies will have to issue a Status Determination Statement to contractors, making their IR35 status clear (inside or outside the rules). We recommend:
• Review current relationships with contractors and/or consultants
• Making sure terms of engagement are clear and accurate
• Providing contractors with a Status Determination Statement
• Consider changing some contractors into employees (if they fall within IR35)
Where IR35 is applicable and determined as such, a contractor’s payments will be subject to PAYE tax and National Insurance Contributions. Onboarding employees who fall “inside IR35” requires following the same procedures undertaken for a new hire, including a contract of employment agreeing pay, auto-enrolment pension, sick leave entitlement and the ability to accrue holiday leave and pay.
What to do if the worker disagrees with the determination
A company must decide the worker’s employment status and if the off-payroll working rules apply. Subsequently, they must tell the worker their decision and the reasons for it.
If the workers disagree, they’ll need to:
• Give details of the employment status determination they disagree with
• Give their reasons for disagreeing
• Keep copies of any records about disagreements
A disagreement can be raised until the last payment is made for the worker’s services. A company will have 45 days from the date of receiving the worker’s disagreement to respond. During that time, the fee-payer should continue to apply the rules in line with the company’s original determination.
How we can help
Outsourcing the responsibilities and compliance related to the IR35 reforms to specialist employment and engagement experts such as Centralus can make the transition much smoother. At Centralus, we actively engage with all of our clients around IR35 during this period to understand the best approach and make necessary arrangements. In the early stages of reform, hiring timelines may be impacted. However, as you are likely to have an increase in employees after the IR35 changes kick in, through our business support services and payroll and pension expertise, we can process your payroll and manage your HMRC responsibilities. Additionally, we can provide new employees with the same range of benefits as existing employees.