5 ways private-sector companies can ensure they comply with IR35 tax legislation
When introduced in April 2021, IR35 - the UK’s off-payroll legislation - represented one of the biggest changes to the private sector in decades. Below we delve into what this legislation is, what it means for companies, and discuss what they can do to ensure they comply.
The IR35 rules apply when a private-sector firm engages a limited company contractor who works through an intermediary, such as a personal service company (PSC) or an umbrella company. In such an instance, the firm will take responsibility for assessing the contractor’s employment status according to the IR35 rules.
For limited company contractors, the reality of this will likely be a significant reduction in take-home pay through additional income tax and National Insurance Contributions (NICs).
For STEM business, the effects of IR35 are far-reaching. In the UK, 84% of businesses use contingent workers, and almost a quarter of the UK workforce works on a contingent basis as a contractor or consultant. While the smallest UK companies are exempt from IR35 regulations, medium-to-large firms that fail to comply with IR35 will face penalties.
If you're one such business, these five steps to complying with IR35 are well worth taking note of.
1) Assess your workforce
Run an audit of all employees currently working at your business. Outline how many contractors you use, identify which (if any) business units use freelance contractors, and attempt to measure the importance of their contribution to your business.
Decide how your business will approach any assessments, who will complete them and how will they be documented to ensure you can demonstrate that have taken reasonable care. Also make sure you have a robust dispute resolution procedure in place for any complaints.
2) Identify who’s inside and outside the new rules
On a case-by-case basis, ascertain which contractors fall inside or outside IR35.
Adopting a blanket coverage approach and declaring everybody is inside may save time and money, you must be able to demonstrate that you have performed due diligence when classifying roles for tax purposes to avoid penalties. Take care to ensure nobody is incorrectly included within the scope of IR35 if they are truly self-employed.
To determine whether the off-payroll rules apply, use HMRC’s Check Employment Status for Tax (CEST) tool. (You can check employment status if you are a worker, a person or business hiring a worker, or a recruitment agency or recruiter placing a worker).
However, a word of warning: the CEST test is not entirely failsafe. Indeed, HMRC has been known to challenge certain CEST assessments — suggesting the test may not be 100% effective in each scenario. If you’re unsure about the validity of your CEST assessment, we suggest seeking professional advice.
3) Calculate the costs
For large businesses that engage with consultants on a regular basis, many workers will likely fall inside IR35. With the additional payroll requirements of the legislation, properly reviewing the costs of contractors is a must.
To compensate for an increase in income tax and NICs, many contractors may also increase their daily or hourly rate. If you’ve followed tip number 2 and communicated updates to your contractors in a timely fashion, any cost increases are less likely to come as a surprise.
4) Ensure your employment policy is up to date
When IR35 was finally introduced in April 2021, you should have created a new policy for any contractors taken on after that date.
While several large firms like HSBC, Sainsbury’s and Vodafone introduced blanket bans on PSC contractors (in other words, all workers must go PAYE), it is important to bear in mind that doing so will likely place limitations on your available talent pool.
To ensure you attract and retain the best talent, it makes sense to keep several options available. These may include partnering with umbrella providers, PAYE, or SOW (Statement of Work) solutions.
You should also take care to clearly outline your company’s stance regarding the recruitment of new workers. Are vacancies for self-employed individuals engaged on a short-term contract basis, or are they permanent or internal contractor positions? On job adverts, make sure you convey to prospective candidates whether they will be bound by IR35 rules.
5) Communicate any changes to your workforce
Contractors are likely to face financial implications due to IR35, so make sure you fully communicate policy changes with any contractors that you engage. Doing so will demonstrate to contractors that you are taking “reasonable care” to assess their status. It will also present them with an opportunity to ask any questions (which they are likely to have) and offer you a chance to minimise any misunderstandings.
You should allow enough time to enable any affected contractors to prepare for any significant changes to their take-home pay, as well as enough time for a dispute resolution process to be completed. SRG can work with you to decide how and when to share this with your contractors.
Further IR35 advice
If you’d like SRG’s support in relation to the IR35 off-payroll legislation and/or accurate status determinations, please get in touch via firstname.lastname@example.org
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