Reforms to IR35 will be introduced from April 2021, which will require medium and large private businesses to consider the employment status of contractors they engage for tax purposes.
We outline below the five main things to think about so that your business is ready for the changes ahead.
Which contractors will be covered by IR35?
The starting point is to identify the contractors engaged by your business that will be subject to the IR35 reforms and whose employment status will need to be assessed from April 2021.
IR35 will apply to contractors you engage to provide personal services through an intermediary, which may be a personal service company, agency or an umbrella company.
If the intermediary involved is a third party, such as an agency or umbrella company, it is important that you check that they are not already paying the contractor through PAYE.
If they are not, the responsibility will fall on you as the engager to determine the contractor’s status and make any relevant income tax and national insurance deductions.
IR35 will only apply to contractors who provide personal services so fully outsourced services, such as cleaning and maintenance, will not be affected.
How will you engage such contractors once the reforms are introduced in April 2021?
If you do not think your business will have the appropriate processes in place to deal with IR35 reform, there are some other ways you could engage contractors:
a) Require contractors to be engaged via an agency or umbrella company who can deal with PAYE and national insurance contributions
This means you will only be responsible for determining the contractor’s status and avoid the administrative duty of making the appropriate tax deductions.
However, the agency or umbrella company will most likely charge you for the cost incurred in operating payroll.
b) Require contractors to become employees of your business or a third-party agency
This will prevent you from being subject to IR35, but it may be costly to your business.
If you engage a contractor who is employed by an agency continuously in the same role for 12 weeks or longer, they will be entitled to the same basic employment rights as your employees, such as pay and holiday.
Although, the onus will be on the agency to match your employment conditions in this situation, they will most likely seek to recover the associated costs from you.
c) Employ contractors as independent self-employed contractors only
Independent self-employed contractors are not subject to IR35, but to avoid the risk of tax liabilities you must ensure that the contractor is truly self-employed and there is no evidence that points to an employment relationship between your business and the contractor.
How will you determine the employment status of contractors?
Once you have identified the affected contractors, you must decide who will be responsible for determining their status and how they will make this decision.
There is a free online tool called ‘Check employment status for tax’ (CEST) on the government website which many businesses use to determine contractors’ employment status.
HMRC will stand by status decisions made using CEST, so long as the correct information is provided and their guidelines are followed.
CEST will also provide you with a suitable status determination statement, which will ensure your business complies with the notification requirements of IR35.
However, it is important that your business has its own decision-making process that can be applied consistently in cases where CEST cannot provide a status determination.
Status Determination Statement (SDS)
Under the IR35 reform, engagers must notify contractors of their status and the reasons for it through an SDS.
The contractor and any third parties involved have the right to appeal your determination and you must respond to an appeal in writing within 45 days.
Therefore, your business should develop a system for creating and issuing SDS’s and responding to challenges.
Are your contracts compliant with IR35?
You need to ensure that the contracts you use to engage contractors enable you to comply with IR35 requirements.
For example, you should reserve the right to pay the contractor via PAYE and collect national insurance contributions if IR35 applies.
You may also need to allow your business extra flexibility in relation to invoice dates so that you can sync with payroll if necessary.
If you engage contractors through agencies, the contract should place the responsibility on the agency to deal with payroll and national insurance contributions and clearly establish who is responsible for covering the associated costs.
How can your processes be updated to deal with the changes?
You must ensure that your business uses effective systems that can make the correct tax deductions and pay contractors subject to IR35 accordingly.
Your payroll system will need to apply PAYE and deduct national insurance contributions from the contractor’s gross fee excluding VAT.
Whereas your accounts payable system will need to pay the contractor’s intermediary (whether this is their own personal service company or a third-party agency or umbrella company) the contractor’s fee net of income tax and national insurance as well as the VAT on the gross fee.
Although contractors subject to IR35 will be paid through your payroll system, you should ensure that they are not mistaken as employees for practices like gender pay gap reporting.