How to prepare your business for IR35 off-payroll working changes

Editor’s note: In the government’s mini-Budget on 23 September 2022, it was revealed that IR35 off-payroll working changes will be repealed from April 2023. This is now not the case. Learn increasingly in our article: Mini-Budget 2022: What the latest announcements midpoint for your business.

Few contractors have not heard of IR35 – the tax avoidance legislation that in April 2021 affects many increasingly businesses than before.

Yet a recent survey by IR35 Shield reported that the majority of in-work contractors (52%) have yet to be assessed for IR35. 86% of contractors have not been provided with vital documentation (a Key Information Document, or KID).

IR35 is tax anti-avoidance legislation originally introduced as part of the 1999 Budget. Its official title is Intermediaries Legislation although the miracle it identifies is moreover referred to as ‘off-payroll working’.

The goal is to legally pinpoint what a contractor is in terms of employment characteristics – and how it’s variegated from an very employee. It ensures those who are for all intents and purposes are ’employees’ are taxed accordingly.

In this article, we examine the new IR35 requirements, which came into gravity in April 2021.

We squint at what it ways for businesses. This is followed by expert input providing guidance well-nigh how businesses can adapt, and moreover what contractors need to do.

Here’s what is covered:

What is IR35?

What’s reverted with the new IR35 requirements?

Who do the new IR35 rules wield to?

When do the new IR35 rules apply?

What does my merchantry have to do to comply with the new IR35 rules?

How do I know if a contractor is a deemed employee under the new IR35 requirements?

What are the new IR35 requirements if I use an organ to rent contractors?

How do I pay a contractor who turns out to be a deemed employee under the new IR35 requirements?

What happens if the contractor disagrees with my IR35 classification?

How does IR35 stupefy construction workers?

Guidance for businesses raising the new IR35 requirements

Guidance for contractors well-nigh the new IR35 requirements

IR35: What now?

What is IR35?

IR35 is designed to identify ‘disguised employees’, moreover referred to as ‘deemed employees’.

These are contractors who work at a visitor in the same way that full-time employees do. They might have their own office desk, for example, and work the same Monday to Friday, 9am to 5pm hours.

However, the work for the merchantry is specified by a contractual try-on and the contractor invoices for hours worked through a third-party intermediary. Most often this intermediary is a personal services visitor (PSC).

Other types of intermediaries are used too, but throughout this article, we refer only to a PSC.

The contractor is powerfully paid for the work via a salary or dividends they take from the PSC.

There’s nothing fundamentally wrong with a contractor working through an intermediary such as a PSC – unless the contractor is a disguised employee. Working that way is considered a form of tax avoidance.

Although the contractor is indistinguishable from an very employee, invoicing for hours via a PSC ways both the contractor and employer stave some tax and National Insurance contributions (NICs).

If IR35 applies, a contractor becomes required to pay a Deemed Employment Payment – essentially, ensuring the contractor pays the same value of tax compared to a regular employee.

Often there’s a uniting of organisations involved in employing the contractor. A visitor might use an organ to recruit and employ contractors, for example, in which specimen the organ makes payments to the PSC.

We discuss this later but, for the examples below, we seem a simple supply uniting of just a single organisation paying the contractor’s PSC and benefiting from their services.

If a contractor is a disguised employee, it ways they aren’t afforded benefits and rights given to very employees, such as mandatory sick pay and holidays. This makes employing the contractor cheaper for the employer, compared to a “real” employee.

Notably, contractors who are sole traders and not invoicing via a visitor (that is, they invoice the employer or organ directly, on their own behalf,) aren’t unauthentic by IR35.

This is considering they pay tax and National Insurance on their earnings in the same way that an employee does, so there cannot be considered to be any tax avoidance.

Note that there has been significant discussion over recent months well-nigh an unintended magnitude of new legislation included in the Finance Act 2020 that was intended to tropical a potential loophole relating to the new IR35 requirements.

An unintended magnitude of this was that it meant umbrella companies, agencies and employers seconding employees to clients fall under the telescopic of IR35 (see unelevated for definitions of these terms).

This was not the intention. HMRC is currently working to fix this error in the 2021 Finance Act.

What’s reverted with the new IR35 requirements?

When introduced in 2000, the IR35 legislation said the PSC had to self-identify.

In other words, it is lanugo to the contractor themselves to examine their working conditions, determine their employment status and take whoopee if they find they are disguised employees.

In 2017, the IR35 requirements were extended to employers for the first time, although only in the public sector.

The onus for performing the employee status determination falls to the employer rather than the contractor, meaning they need to icon out if the contractor is a disguised employee. If so, they have to pay them accordingly.

This ways deducting employee tax and National Insurance contributions (NICs) at source, via PAYE, including the employer NICs too, as with any other employee.

This requirement to identify and correctly pay the relevant taxes on disguised employee contractors expands to medium/large-sized private businesses as of April 2021.

Many increasingly contractors will be affected.

Some businesses will find themselves with a significant spare legalistic undersong in order to comply with IR35, not to mention a financial undersong when contractors have to be transferred to their payroll and employer NICs widow to the forfeit of hiring the contractor.

In response to the IR35 expansion, some potentially unauthentic businesses are simply refusing to rent contractors without April 2021. The contractor is required has to join the payroll as an employee, or take their services elsewhere.

Who do the new IR35 rules wield to?

As of April 2021, IR35 places requirements on medium and large private companies. The rules for identifying the size of a merchantry are based on those set out in the Companies Act 2006, section 382.

They are ramified and businesses should consult a qualified expert to make a determination.

In general, a limited visitor is considered medium or large if two or increasingly of the pursuit wield in a given financial period, and moreover unromantic for the prior period:

• Annual turnover is increasingly than £10.2m
• Balance sheet total is increasingly than £5.1m
• The stereotype number of employees is increasingly than 50.

If a merchantry is unincorporated then only the turnover icon whilom is used to make the identification.

The existing IR35 rules applying to public sector employers protract as surpassing the April 2021 IR35 rule changes came into force.

As mentioned earlier, tropical reading of the Finance Act 2020 might indicate that IR35 moreover applies to umbrella companies, agencies and employers seconding employees to clients.

HMRC has stated publicly that this is an error, and that this doesn’t wield as of 6 April 2021 when the new IR35 rules began.

When do the new IR35 rules apply?

For medium and large private sector entities, the new rules unromantic to work carried out on or without 6 April 2021.

If the contractor’s work with the visitor ceased surpassing this time then it fell outside the new IR35 requirements.

If the payment was for work washed-up surpassing 6 April 2021, and the contractor continues to work for the company, then the new IR35 requirements wield to payment made without this stage for work washed-up surpassing this date, and all future payments.

What does my merchantry have to do to comply with the new IR35 rules?

Both public and medium and large private employers have the pursuit obligations as of April 2021 (although preparatory work will need to take place by the visitor to ensure full compliance):

• Determine the employment status of each contracted worker who works via an intermediary ensuring that they ‘take reasonable care’ in making the determination. HMRC’s Check Employment Status for Tax (CEST) tool can be used for this.
• Once the status has been determined, provide a status determination statement (SDS). They must share the statement and the reasons for that determination to the party with which they contract, and the off payroll worker.
• Keep detailed records of contractors and their SDSs, including the reasons for the determination and fees paid. This will involve creating a system to securely maintain these records.
• Have processes in place to deal with any disagreements that upspring from their determinations. Such disagreements can be made by the contractor or the visitor paying the contractor (the organ recruiting and paying the contractor on behalf of the business, for example). There is no time limit for making such challenges.
• Establish if you are the ‘fee payer’– see “What are the new IR35 requirements if I use an organ to rent contractors?” unelevated – considering this directly impacts who has to run the payroll for the off-payroll contractor(s).

Small businesses don’t need to do anything here considering they aren’t unauthentic by the new IR35 requirements.

Contractors should protract to make their own determinations well-nigh the nature of the engagement with the visitor they work for.

Working for companies that aren’t covered by the IR35 changes, such as a small private entity, require the contractor to self-determine if IR35 covers them.

How do I know if a contractor is a deemed employee under the new IR35 requirements?

HMRC provides an online tool tabbed Check Employment Status for Tax (CEST). This can be used to determine a worker’s tax status by answering several questions.

This can be used by the party responsible for delivering out the employment status determination – this stuff either the contractor, or the merchantry they are providing services too (the client).

The legislation says ‘reasonable care’ must be taken in making determinations. Some guidance has been provided by the government on what this means.

HMRC has told chartered written soul ICAEW that using the CEST tool satisfies this requirement, providing the information entered is well-judged and the tool is used in vibrations with HMRC’s guidance.

According to the ICAEW, HMRC has moreover confirmed with it that an SDS accompanied by the PDF outputted by CEST satisfies the requirement to provide the reasons for the determination with the SDS.

What are the new IR35 requirements if I use an organ to rent contractors?

IR35 requirements placed on an employer wilt a little increasingly complicated if they don’t directly pay the PSC (and therefore the contractor).

It’s very worldwide within the IT or construction industries for an organ or plane several agencies to be used to recruit a contractor and pay them via their PSC.

Should a contractor be identified as a deemed employee, IR35 legislation identifies a fee payer for the contract.

In the simplest situation, the fee payer is the same merchantry contracting the individual, and for whom the contractor provides work.

But often it’s an agency. Sometimes there are several agencies.

This matters considering the fee payer has legal requirements when it comes to payroll – see “How do I pay a contractor who turns out to be a deemed employee under the new IR35 requirements?” below.

The merchantry for which the contractor provides work should pass the SDS they create on to the agency, as well as to the worker.

Should there be increasingly than one organ then the SDS should protract to be passed on lanugo the uniting until it reaches the party that pays the PSC. This is the fee-payer.

But there are some very important notes:

• The liability for deducting tax and NICs sits with the merchantry until they pass on the SDS to the next party in the chain.
• If any party in the uniting receives an SDS but fails to pass it on, they wilt the fee payer. A party is not liable for deducting tax and NI until they receive the SDS.
• If no other party in the supply uniting meets the whilom conditions, the client becomes responsible.

How do I pay a contractor who turns out to be a deemed employee under the new IR35 requirements?

If a contractor is identified as a deemed employee then the fee payer – see “What are the new IR35 requirements if I use an organ to rent contractors?” whilom – has some specific requirements when it comes to processing the payment.

• The fee payer is responsible for gingerly the PAYE, employee and employer NICs (and the tutoring levy, if applicable).
• The fee payer must report any payments to the PSC, or to the organ the contract is with. A Full Payment Submission (FPS) must be made through the Real Time Information (RTI) system listing the taxes and National Insurance contributions deducted. A payslip can be issued to the deemed employee, or this tax and NIC information can be listed on a remittance notice.
• The fee payer is responsible for issuing an end of year taxable summary form (P60) or end of employment taxable summary form (P45).
• The fee payer must not deduct student loan repayments, or auto-enrol the worker, or make statutory payments (SSP, SMP, etc). The PSC should do this as required.
• It’s good practice to unchangingly provide a payslip and inform the PSC how much tax has been deducted so they can reconcile, but these aren’t currently demanded by HMRC.

RTI has a new off-payroll worker flag – OPW (off payroll worker) – that must be used for deemed employees. Payroll software may need to be updated in order to offer this feature.

If you use deject payroll software then it should have been automatically updated in time for April 2021 (it’s worth checking with your vendor).

Fee payers can use the same payroll as for other employees, and simply deploy the OPW flag as required, or run a separate payroll where all employees have the OPW flag set.

There’s no requirement to add deemed employees to your existing payroll, unless this works weightier for your business.

However, you will have to create a new payroll if the payments are not otherwise reported under your existing PAYE scheme.

The tax lawmaking to use will probably be BR, considering the deemed employee is considered to have a primary employment with their own intermediary.

You may need to issue a new starter checklist to the deemed employee to gather the required information.

What happens if the contractor disagrees with my IR35 classification?

You may find that a contractor or organ disagrees with your findings via CEST, and therefore your nomenclature of them as a deemed employee.

Under the proposed client-led status disagreement process, proposed by the government, the contractor can contact you with their reasons for disagreeing.

You must then respond within 45 days, during which time you should protract to wield the rules in line with your original determination.

You might respond restating your identification of the contractor if you protract to believe that’s the case, or the new information provided by them might midpoint they are not a deemed employee.

You should definitely communicate with them to discuss the situation and try to uncover all the pertinent information, and protract to undergo by the findings of the CEST tool in any event.

If you decide the contractor is not a deemed employee then you should communicate that to them and to the fee payer if an organ or other third party is used to pay them.

How does IR35 stupefy construction workers?

Sub-contractors could be unauthentic by IR35 if they operate as an incorporated business. IR35 takes precedence over the Construction Industry Scheme (CIS) requirements, although both seek to withhold tax and National Insurance at source.

In other words, medium or large construction contractors falling within the new IR35 requirements should unchangingly consider incorporated sub-contractors as deemed employees if the IR35 rules outlined whilom apply.

They should therefore not wield the CIS.

Guidance for businesses raising the new IR35 requirements

Jill Smith is Policy Operations Manager at The Chartered Institute of Payroll Professionals (CIPP) and provides the pursuit five pieces of translating for businesses finding themselves having to transmute to the new IR35 requirements. The CIPP offers an IR35 webinar.

Start the process now

Start the preparation. You’re going to need good liaison skills wideness the team, or your organisation. It’s got to be a team effort.

Who’s going to manage the changes required within your merchantry and ensure the right people from the areas wideness the merchantry are involved and committed? Squint at upkeep constraints.

What impact is this going to have on your company?

Start reviewing

What does your current workforce squint like?

Your organisation needs to review current contractor engagements. Ensure any intermediaries such as PSCs are identified. Safeguard the merchantry from risk by undertaking due diligence on your labour supply chain.

Were the workers sourced through a third party such as an agency? That’s really important.

How are you going to assess the employment status of each worker that you’ve got, to have a well-spoken and resulting methodology in the company?

Decide how the status determinations will be made

Some companies, such as Lloyds Bank, are taking a blanket approach. The CIPP suggests lamister a wrap tideway to determinations.

Make sure each status determination statement you do is separate for each individual and each engagement considering it could be very different.

You need to consider a process to assess whether the status of workers may have reverted or it may transpiration over a period of time.

Communicate with the contractors

At the CIPP, we suggest that if you are going to use the CEST tool to make your towage you consider doing it together with the contractor.

Have a process within the visitor when you’re asking the questions required for CEST – ensure you’ve gone through the CEST tool and know what’s going to be asked, so you can gather in whop all the information you will need to wordplay each question.

There are some questions it asks virtually whether yours is the worker’s only employment.

If you haven’t got good communications with the worker, you might not know the wordplay but if you well-constructed the CEST tool together you will have all the information you need.

Train your staff

Who’s responsible for the changes within the organisation and do they understand the rules?

Factor in staff training requirements, consider the need to outsource any specialist knowledge and advice.

Ensure everyone you outsource to is reputable.

Guidance for contractors well-nigh the new IR35 requirements

Dave Chaplin is founder and CEO of ContractorCalculator.co.uk, which has been recommending contractors well-nigh IR35 since its introduction. His website, IR35shield.co.uk, offers several IR35 tools to help determine employment status.

Here, he offers some translating to any contractor concerned well-nigh the new IR35 requirements.

Chaplin says: “There’s a misconception. Contractors are saying, ‘Oh, now I need to learn well-nigh IR35…’ Well, you should’ve known well-nigh IR35 20 years ago. IR35 has unchangingly unromantic to you.

“What’s reverted is that the determination on the status has moved to the vendee and there is a variegated tax calculation. It’s new legislation. But the concept of a deemed employee has been virtually for 20 years.

“Contractors need to be informing their clients and encouraging them to start looking at this as soon as they possibly can.

“The danger is that, if the vendee runs out of time, they’ll introduce a wrap policy that says we won’t rent anyone who’s working through a limited company. That’s what banks have done. There’s nothing to stop other firms doing it.

“The risk to the vendee is that their contractors will go and work somewhere else, or they will have to pay them considerably more. So, if the vendee is sensitive to the commercial fallout, then they need to be alerted by the contractor as soon as possible.

“Clients and contractors need to stave the cliff-edge scenario.

“Agencies and firms need to work together too and, particularly, contractors need to encourage the organ to work closely with the vendee to make sure that the organ themselves are going to be happy with the determinations.

“The contractor needs to have the SDS paperwork to requite themselves comfort. If they don’t have the paperwork then they might want to consider working somewhere else, where they can get the vestige that shows that they are outside of IR35.”

IR35: What now?

This vendible has provided guidance well-nigh IR35 but there remain a significant number of unknowns virtually the legislation and its implementation.

It’s been reported that the government is reviewing IR35 in light of this lack of understanding.

If nothing else, the written impact for medium and large businesses will be significant – those paying the contractor will have to examine their double-entry and written processes.

There are now specific insurance products for contractors to protect them from the consequences of IR35.

The insurance attempts to protect the contractor from the forfeit of an HMRC investigation and any resulting when tax, interest and penalties (depending on the level of insurance taken out).

Might we moreover expect similar insurance products for business/fee-payers? Only time will tell but this certainly should be considered by businesses.

Editor’s note: This vendible was first published in March 2020 and has been updated for relevance.

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