What is IR35 and how will it impact you?
If you are a contractor or a company that employs contractors, you are going to want to know as much about IR35 as possible. Draft legislation that was introduced in the 2020 Finance Bill has already launched public sector changes that clamp down on IR35 regulations, these clampdowns are set to be rolled out to the private sector on April 6th 2021.
What is IR35?
IR35 is the name used for the group of rules defined by the government that ensures contractors pay roughly the same tax and National Insurance contributions as employees.
The IR35 reforms laid out initially in 2017 for the public sector are intended to prevent anyone from disguising their employment relationship by using an intermediary, also known as a Personal Service Company (PSC) and therefore avoiding being treated as an employee and the taxes that come with this status.
What IR35 rules are changing?
At the moment, the onus is on the contractor or the contractor’s PSC to determine how much tax is deductible from their earnings. Under the new rules, the fee-payer (the person making the payment to the PSC) is treated as making a payment of earnings to the worker and is consequently required to use the traditional PAYE (Pay As You Earn) system that is used for employees.
When there are recruiters, like Select, managing a contract placement, the chain between the client and the contractor/PSC gets more complicated. However, the client is still required to determine the IR35 status of the worker, but the PAYE obligation falls on the agency that actually pays the worker.
The process by which a client determines the IR35 status of a worker, is being called a Status Determination Statement (SDS). This statement should be completed and communicated to all in the labour supply chain until it reaches the fee-payer, prior to the first payment to the worker. The SDS must cover two important things:
- The conclusion of the client as to the IR35 employment status for that worker, whether they fall inside or outside regulations
- The reasons for their conclusion.
Who will be affected by these new IR35 changes?
Crucially, IR35 changes will affect contractors that are engaged via a PSC and are not placed on the company payroll. So, from 6th April 2021, you will be affected by these IR35 reforms, if:
- You are a worker who provides services to clients through an intermediary
- You are a client who receives services from a worker through an intermediary*
- You are an agency providing workers’ services through an intermediary.
* For smaller businesses engaging contractors through PSCs, you are exempt from the IR35 changes. The changes are only going to be applied to companies with an annual turnover of more than £10.2 million, a balance sheet total more than £5.1 million and more than 50 employees.
If you are unsure of your status regarding the above, there is a handy tool on the government website to help you determine whether you fall under these rules or not. It can be found here.
What can you, as a business, do to prepare for IR35?
As the new IR35 rules come into effect on 6th April 2021, all businesses that use contractors need to prepare to make changes prior to this date. Here are some steps you might consider:
- Carry out an audit on all of your existing contractors across the business, with a focus on those that have contracts extending beyond 6th April 2021.
- Make sure to find out which of those contractors fall inside the new IR35 regulations. For those on the margins, consider realigning your working practices to make these workers more clearly outside or inside of IR35.
- Be transparent. Those workers affected by any changes you make may see a considerable decrease in their take home pay, so remember to communicate any changes clearly and in advance of them taking effect.
- Assess how the changes you make are going to affect you financially and make corresponding amendments to your budgets.
- Review all of your HR documentation relating to Contractors to ensure they all reflect the changes you’ve made – especially those used when onboarding new contractors after April 6th.
If you use Agency Contractors, you will need to ensure that your agency has taken the necessary steps in order to process Contractors under PAYE as and when needed. At Select, we have all the necessary steps in place in order to comply with the new rules and as members of the REC (Recruitment and Employment Confederation) we are kept up to date on how best practice evolves, so we can adjust accordingly.
If you would like to have a chat with someone at Select about engaging contractors, please get in touch.