24 March 2021
Preparing for new IR35 rules: are you ready?
IR35 is an anti-avoidance tax legislation designed to stop companies from using ‘disguised employment’ as a way of getting around their tax and national insurance obligations.
The change in rules for IR35 was delayed from 2020 like a number of other proposed legislative updates. Last year, we ran a poll of 1,228 people who are responsible for IR35 preparations at their respective company and found that 74 percent were not ready for the new rules, leaving the business exposed to potential rising costs and a significant skills shortage in the future.
Fast forward and from 6 April 2021, the change in rules is still scheduled to happen meaning medium or large-sized businesses in the private sector and voluntary sector will be responsible for assessing whether contractors need to pay income tax and national insurance contributions. Previously, such checks have been carried out by contractors themselves.
The reformed rules – known as IR35 – have been in place for public sector organisations contracting workers supplied through their own personal service companies (PSCs) since 2017. During this time an analysis of ONS (Office for National Statistics) data has found the number of off-payroll workers in the public sector – those classified as outside IR35 – has dropped by 9 percent.
The Government’s Check Employment Status for Tax (CEST) service provides a simple step-by-step solution to help organisations quickly and accurately assess if IR35 working rules apply to individuals.
Where employees fall inside the rules, businesses will be responsible for deducting income tax and National Insurance contributions (NICs) via PAYE and will be required to pay employer NICs.
Neil Tonks legislation expert at MHR warns: “IR35 represents a significant change in the way organisations in the private sector employ and pay their contractors. Preparing for the change is no easy task with the process estimated to take three to four weeks to complete, so it is critical that companies don’t pay lip service to the new rules and treat IR35 assessments as an urgent priority to ensure they fully comply.
“Failure to correctly assess contractors could lead to backdated demands for unpaid PAYE, tax, and NIC, and fines for delays and late submissions, not to mention reputational damage which could impact the ability to attract contractors and other temporary workforces, who provide invaluable flexible expertise.”
HR and payroll professionals have a key role to play in helping employers embrace IR35 rules. Neil Tonks outlines six top tips to prepare from an HR perspective to ensure you don’t fall foul of the new rules.
1. Carry out an audit of your contractors
The first step to getting IR35 ready is to conduct a full audit of all employees and contractors currently working within your business.
Firstly you need to get a clear understanding of how many contractors you use, which parts of the business use them, and how important their contribution is to the business.
All too often contractors are hired by individual departments rather than via central recruitment teams so you may not know they exist. Don’t assume that they will be on your HR or payroll system because more than likely they won’t. However, they will need to be under the new rules.
2. In or out
Once you have audited the contractors you use, you need to determine if they fall ‘inside’ or ‘outside’ of the new rules. Best practice is to assess individually on a case by case basis, though if groups of contractors are engaged on standard terms the same assessment may be applied to them all, provided you’re sure the arrangements are genuinely identical. While it may be tempting to adopt a blanket ‘everyone is inside’ approach to save time and money, this must be avoided as it can lead to serious repercussions for failing to demonstrate reasonable care to correctly classify such roles for employment tax purposes.
The Government’s Check Employment Status for Tax (CEST) service will help you determine whether IR35 working rules apply.
3. Create a clear communications plan
It’s important to communicate with your contractors every step of the way so they are fully aware that you are taking ‘reasonable care' to assess their status.
Once you have determined the employment status of your contractors it’s important to have an open conversation with them to provide reassurance and minimise any conflict and confusion.
Contractors affected by the new rules may disagree and will naturally have lots of questions to ask. Switching to PAYE could reduce their take-home pay and they will also be worried that it could impact future employment.
Recent research found that four-fifths of contractors are more likely to work with a company that has proper IR35 policies and procedures in place, so being open and transparent will ensure you can continue to attract the best flexible talent.
4. Introduce a new agreement policy
The employment status of your contractors will need to be clearly outlined in an agreement policy. You will more than likely need to formulate a new agreement policy for any new contractors you take on from April while existing contractors might need their agreements to be adjusted when they run into the new financial year. You will need to identify which part of the business is responsible for this, what level of knowledge exists in the business, and whether additional training and support is required.
5. Consider the true cost to your business
HR departments need to be aware that the cost of employing such workers could rise as a result of IR35.To compensate for their tax and NIC contributions being deducted at the source, many contractors may look to increase their daily or hourly rate. To help minimise the impact of any increase in fees, talk to your contractors impacted by the change at the earliest opportunity so any cost increase doesn’t come as a surprise and can be budgeted for. Any negotiation you can do may help minimise this.
6. Setup your HR and payroll system
If your contractors operate through an agency, it is the agency’s responsibility to deduct the tax and pass that info on to HMRC. In this instance, the contractors would be on the agency payroll and not your own.
Other than that, contractors who fall inside IR35 will need to be set up on your payroll system. The best practice is to group them together on their own payroll cycle. Not only will this simplify the process but helps with your data analytics.
Contractors inside IR35 aren’t entitled to receive a payslip but you are obliged to inform them how much tax and NI has been deducted.