The IR35 changes which came into force on 6 April 2021 are a monumental shift for accounting and payroll teams across the UK.
Medium and large businesses will now need to take significant care when taking on contractors and to re-evaluate all existing contracts that necessitate payments to a contractor who is selling their services via a personal service company (PSC) or similar. In other words, IR35 ceases to be a matter just for contractors as is typical in the private sector.
Below, I share five reminders for those handling accounting and payroll within an organisation to aid understanding among the wider business for the legislation change that came into force on 6 April 2021:
1. Be clear on what IR35 entails
IR35 is designed to reduce tax anti-avoidance by legally defining what constitutes a ‘contractor’ when it comes to employment characteristics. The aim is to spot ‘disguised’ or ‘deemed’ employees. The new changes then make medium and large organisations hiring ‘deemed employees’ pay the relevant taxes.
Those who are indeed ‘deemed’ employees do not have to pay certain tax and National Insurance payments themselves. They also benefit from the same rights as employees, like holiday allowances and sick pay.
2. Help your medium or large business understand what it means
The onus is now on medium and large organisations to know and share the status of their contractors according to IR35’s requirements. Mistakes will not be tolerated by HMRC after the soft-landing period, so here’s what accountants should check:
a) Update systems and manage admin effectively
Ask yourself: are all of your organisation’s systems and internal processes IR35 ready?
Ask administrators to refresh their approach to ensure efficiency. Ensure they have the administrative resource to review contracts, create status determination statements, create new procedures around hiring contractors or moving those with whom you currently work to the payroll.
b) Don’t be afraid to change processes
Help your organisation to review the existing contractor hiring processes. How can it be more efficient?
Refresh old attitudes to save money. For instance, many assume that hiring a contractor is less expensive than paid employees in a given role, but when you consider the admin time and now the IR35 non-compliance risk, is this still the case? Standard employment contracts could be a better option, if it works for your business and is desirable for your contractors.
c) Keep everyone in the loop – including contractors
All business areas using contractors should have awareness of IR35 and its requirements, as well as how serious non-compliance is. Since IR35 is here to stay, speak to all business departments about the legislation and how it will affect them in the future.
Don’t keep your contractors in the dark. Work with your HR teams to communicate effectively to contractors by offering, for instance, the Check Employment Status for Tax (CEST) tool. Payroll and HR teams need to work together alongside contractors in order to ensure complete transparency when carrying out employment status checks.
d) Things could change – so keep listening
The full impact of IR35 won’t be felt until after 6th April 2021 – and from there, clarification of exceptions could smooth out the implementation for medium and large organisations.
Listen to any new developments announced by HMRC, as its team irons out any complexities in the legislation, and continue to keep everyone engaged in the conversation.
e) Be prepared for any contingencies
This is tricky legislation, and the chance of getting an IR35 determination incorrect exists. This is not a disaster in the first year of the legislation, but will require time and effort to get right.
Keep budget aside to ensure that any mistake can be quickly cleared up, leaving the contractor feeling in the loop. Ensure that you have a set method stated within contracts to allow recovery of any money from your misidentified contractors.
3. Will IR35 apply to my business?
The answer is probably, if you are a medium or large-sized company. However, to check, explore the definitions in Companies Act 2006, section 382. You can also use a ‘simplified test‘ to check.
Remember, if your organisation meets these criteria in the future, you will need to apply the legislation from the beginning of the tax year after the end of the second consecutive financial year in which you meet the criteria.
4. What if there’s an agency involved?
IR35 requirements for organisations are more complex if an agency pays the personal services company (PSC).
When an agency is involved, the fee payer (the company for whom the work is being done) has legal requirements when it comes to payroll.
The organisation should give the status determination statement (SDS) to the agency, as well as the contractor. In the case of more than one agency, it must be passed through until it gets to the fee-payer (person paying the contractor). If you’re unsure, check the government’s official guidance.
5. What is the ‘soft-landing’ period for IR35?
HMRC recently announced that it will not be handing out penalties for the first 12 months of the new rules: a soft-landing period. However, it is worth noting this does not include deliberate non-compliance, and only affects client and fee-payer organisations.
Contractors will not be affected by this grace period, since HMRC considers that the additional administration burden will fall upon the clients and fee-payers.
Is your team ready for IR35?
This legislation affects companies more than they might realise. With the majority of in-work contractors yet to be assessed for it, and the majority of contractors not provided with vital documentation (including status determination statements), it is clear that there is much work to be done by accounting and payroll teams to advocate for compliance across the business. Start with communication and making the gravity of the new legislation clear.
IR35 is not a one-off. It’s here to stay and will bring valuable benefits to organisations that can get it right quickly.