How to prepare for changes to IR35
IR35 changes come into effect in April 2021. As a result, organisations will be responsible for determining if an independent contractor is considered an employee for tax purposes and should prepare themselves for the responsibilities associated with their new obligation.
What is IR35?
IR35 is the abbreviated name given to anti-tax avoidance legislation. Under the legislation, a contractor who provides their service via an intermediary, such as a limited company, may be liable to pay tax and national insurance as if they were an employee.
When does IR35 apply?
When determining if IR35 applies to a contract or engagement, HMRC requires companies to “work out the employment status of the person providing their services.” Where a contractor provides their service through an intermediary, such as a limited company, but would be considered an employee if there was no intermediary, IR35 may apply.
It is unlikely that a Statement of Work will be sufficient to determine the status of an individual and consideration should be given to several factors, including:
- Degree of control: the more control you have over the individual the more likely they may be considered an employee
- Substitute: if the individual can send a substitute this will lean away from classification as an employee
- Integration: the more integrated into a Company an individual is, for example by having a uniform, a Company email, equipment provided, the more likely they may be considered an employee
- The more clients an individual may work for, the more this will lean away from the classification as an employee.
The HMRC have a quiz that companies may use to check the employment status of an individual for the purpose of tax.
What are the upcoming IR35 changes?
Before April 2021, the onus on deciding if a contractor is subject to IR35 is on the contractor themselves, after April 2021 it shall be on the company engaging their services.
If the company decides a contractor is an employee for the purpose of tax, from April 2021 they will need to deduct tax and national insurance from the contractor’s payment.
The upcoming changes only affects organisations that are classified as being a medium or large business. The upcoming changes do not affect small business. A contractor engaged by a small business will continue to be responsible for determining their employment status themselves.
A business is classed as medium or large if they meet two of the following criteria:
- Annual turning over of more than £10.2 million
- Balance sheet total of more than £5.1 million
- 50 or more employees
How to prepare for the upcoming IR35 changes
Organisations can do several things to prepare for the upcoming changes, including:
- An audit of contractors: Companies can audit all the contractors they currently engage detailing how many contractors are engaged, the areas of the business they provide services for and the importance of their contribution.
- Categorisation of contractors: Contractors should be considered on an individual basis whether they fall inside the rules and if the company will need to pay tax and national insurance.
- Communicate with contractors: Companies should communicate with their contractors to inform them their status is being reviewed and their determined status. If it is determined that a contractor is subject to IR35, they should be sent a Status Determination Statement setting out the reasons for the decision before the first payment is made. There should be a clear procedure for the decision to be appealed. Through the communication, contractors may attempt to increase their rates to mitigate the deductions and companies should be prepared to answer questions surrounding this.
- Review documentation: The employment status of contractors should be stated in their engagement agreement. Contractor agreements should be reviewed ahead of the engagement of new contractors from April 2021 and existing contractors should have their position confirmed to them.
- Review payroll systems: Contractors who will be affected by the change will need to be set up on a company’s payroll system. If the contractor is provided through an agency, it is the agency’s responsibility to deduct tax and national insurance.
If you would like and assistance on determining the status of contractors or a review of the consultancy agreement and would like to speak to an expert employment lawyer, please do not hesitate to call us on 02079036888 or email us via firstname.lastname@example.org