Chances are, if you’re a business owner, you’ve probably heard a considerable amount about IR35, an update to off-payroll working that is causing considerable consternation among freelancers and the companies that employ them.
Depending on whether you employ contractors and meet certain criteria, your business may be impacted by the implementation of the new IR35 rules.
The new rules are already in force for public sector bodies and were initially scheduled to apply to private sector firms from April of this year, before being delayed until April 2021 due to the impact of COVID-19.
With the new rules just six months away, then, and still the topic of contentious debate among contractors, businesses, industry bodies and politicians, what are the changes to the rules? Will they impact your company? And, if so, what should you do to prepare?
Which companies are impacted?
First things first, you’ll want to know whether IR35 applies to your firm or not. Simply, IR35 applies to all private sector businesses that engage contractors, bar those that meet at least two of three criteria which qualify them as a small business.
The criteria are: having under £5.1 million in assets; having turnover of £10.2 million or less; employing 50 people or less.
If two or more of these apply to your business then IR35 does not concern you. If not, however, then the legislation will apply to your business and you will need to fully prepare for its implementation in April next year.
What is IR35?
IR35 is a piece of legislation introduced in 2000 to tackle a problem widely referred to as “disguised employment”.
When a business hires someone to work for them as a contractor, rather than an employee on the payroll, they are not required to pay National Insurance contributions (NIC) and don’t need to offer employee benefits.
For workers this could also be beneficial as, despite forfeiting some employee benefits, contractors are generally paid more than payroll employees.
Disguised employment is when contractors and/or companies seek to take advantage of these benefits, despite the contractor being engaged with the company in a way that is no different to a payroll employee.
Initially, IR35 served to add an extra level in the assessment of a contractor’s role with regards to determining whether they needed to pay tax or not.
Being “inside” IR35 means the contractor is considered a normal employee, meaning they’ll need to be on the payroll and have tax and NIC deducted from their pay. “Outside” IR35 means that a contractor is considered a genuine freelancer and can continue to work and get paid as such.
The new rules
Currently, contractors working with private sector companies are the ones who determine for themselves whether or not they are inside or outside IR35.
From next April, however, the rules that currently apply to the public sector will apply to private sector firms too.
This means that businesses, unless they meet the criteria listed above, will need to determine for themselves whether a contractor they engage is inside or outside of IR35.
What does this mean for your business?
If your business engages contractors and does not meet the exemption criteria then it is your job to check the status of your workers in order to determine their status. This can be done using an online HMRC test which will allow you to determine whether workers are genuine workers or employees.
It is important to complete this test, which you can find by searching “check employment status for tax”, even if you are confident that you already have a contract in place, in order to ensure that you have the documentation in place to prove that your contractors are genuinely contractors.
This is necessary because, even with a contract in place, this will be disregarded by a HMRC inspector, who will instead seek to determine the actual working relationship between your company and the worker, creating a “notional contract” if the services contract does not reflect the actual relationship.
Once this is done, you’ll need to send your contractors a Status Determination Statement confirming their status, as well keeping a copy for your own records. After this, you should review your payroll, enrolling those within IR35 for tax, NICs, P45 and P60.
Taking the time to do all this will be well worth it to ensure that all your employment contracts are accurate and above board and to ensure that you don’t face a costly HMRC investigation which could result in a hefty bill.
If you still have any concerns or there are contractors whose status you are not sure about, remember that there are always IR35 experts that you can consult, as well as a huge amount of online resources on the guidelines.