Whilst there has been more than enough for businesses of all sizes to cope with in terms of the pandemic and Brexit last year, it was decided early in 2020 by the government to delay the roll out of IR35 to private business. The rules will now come into force in April 2021.
It does indicate huge changes to employment tax regulations – and let’s not under-estimate the large financial penalties for noncompliance. Notwithstanding the continued navigation through the pandemic and still assessing the impact of Brexit, another huge change faces businesses – and therefore efforts need to be placed on preparing and ensuring compliance for the roll out of the regulation changes.
What does the government define as the IR35 off-payroll working rules?
These can apply if a worker (sometimes known as a contractor) provides their services through their own limited company or another type of intermediary to the client.
An intermediary will usually be the worker’s own personal service company, but could also be any of the following:
- a partnership
- a personal service company
- an individual
The rules make sure that workers, who would have been an employee if they were providing their services directly to the client, pay more or less the same tax and National Insurance contributions as employees. These rules are often known as ‘IR35’.
The client is the organisation who is or will be receiving the services of a contractor. They may also be known as the engager, hirer or end client. The client will be responsible for determining if the off-payroll working rules apply.
A sole trader is not affected by IR35 as the legislation only applies to incorporated companies.
How do I know if my company is eligible?
From 6 April 2021 the proposed changes will require all public sector authorities and medium and large-sized private sector clients to 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.
What is the Understanding of a small client mean in terms of IR35?
A business will always be small for its first financial year and will continue to be treated as small until it fails to meet the requirements to remain small.
The definition of what is a ‘small business’ is taken from the Companies Act 2006 and will apply to limited companies, LLPs, unregistered companies and overseas companies.
A business will be small if it satisfies two or more of the following requirements:
- It has an annual turnover not exceeding £10.2m
- It has a balance sheet total not more than £5.1m
- It had an average of no more than 50 employees for the company’s financial year.
So, what do I do if my business is eligible for IR35
Undertake a Review
Firstly, undertake a review of your existing contractor and permanent staff. Where you are unsure of workers status, take steps to clarify whether they fall within or out with IR35 rules.
Equally if you are reliant on recruitment companies and agencies, ensure that you have their reassurance and proof of their compliance with the new IR35 rules. Check how contractors are hired within the company and that this can be tracked back.
Assess the Cost Implication
Next would to be establish whether the continued use of such an arrangement of a contractor which falls in the IR35 category the affordability. Look at alternative options such as replacing with permanent, fixed term recruitment.
Communicate outcome of Review and Decisions Taken
Following the review and assessment, a company should communicate clearly to the contractors how they wish to move forward and their future within the company – ensuring that key dependency and critical contractors are registered on risk registers for ongoing monitoring and action.
Plan Future Resource Demand
Look at future resource needs, assess how you will resource the need, and if a contractor is the most suitable and best option, that they are introduced carefully, and that full assessment is taken on their classification.
Most worrying of all…
According to the proposed laws which will come into force, HMRC will be able to examine contract agreements up to 6 years to check if the legislation applies – so be prepared and ensure that you have placed financial provision if you think your company is eligible for IR35.
Do get in touch with Bower HR to assist in assessing your IR35 eligibility.
Serena Bower (MCIPD)
Bower HR Consultancy
January 2021
