IR35, the UK’s off-payroll legislation, is rapidly approaching. Representing one of the biggest changes to the private sector in decades, the new law will finally come into force on 6 April 2021 after a year’s delay. With only months left to prepare, businesses that are still unprepared for IR35 need to prioritise compliance.
The upcoming IR35 rules will 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 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 set to be 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 1.5 million UK companies will be exempt from the changes, medium-to-large firms that fail to comply with IR35 will face penalties.
The next few months are critical for private-sector companies. According to a recent survey by IR35 Shield, 52% of contractors are still yet to be assessed for IR35 — partly due to the disruptive effects of COVID-19. Meanwhile, 57% of businesses expect at least half of their contractors to leave their roles.
Here are five steps to help your business transition through the upcoming changes and ensure you comply in time.
1) Assess your current 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 the 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 are likely to fall inside IR35 from April. With the additional payroll requirements making workforce disruption a likelihood, 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) Update your employment policy
You’ll need to create a new policy for contractors you take on after April 2021.
While several large firms like HSBC, Sainsbury’s and Vodafone have introduced blanket bans on PSC contractors (in other words, all workers must go PAYE), 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 the changes to your workforce
In June 2020, SRG ran a survey with contractors who were involved in the process leading up to the initially planned April 2020 date. Only 37% of contractors felt that their client had communicated well during this period, with many commenting that they received their tax status determinations too late.
Contractors are likely to face financial implications, 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 the 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