IR35: A Guide for Employers
IR35, also called off-payroll working rules, was introduced in 2000 to close a loophole being exploited by some individuals in order to avoid paying higher tax rates. By supplying their services via an intermediary (such as an Ltd Company) instead of as an employee, they avoid paying employee income tax and national insurance contributions. IR35 tests a worker’s employment status to identify anyone claiming to be self-employed when, they are employed. When someone is deemed to be working ‘inside’ IR35 (employed), PAYE deductions must be made from the contractor’s pay. Since 2000, contractors have been able to determine their IR35 status.
From April 2021, the government will be extending the existing IR35 reforms to cover the private sector. This follows the public sector reforms, which took place in 2017. The reforms were originally planned for April 2020 but were delayed due to the Coronavirus pandemic’s economic impact. The changes, when finally introduced, will shift the responsibility for making IR35 status assessments from the intermediary providing the worker (i.e. the limited company) to the agency or end client who pays the limited company.
The changes coming for IR35 in the private sector from April 2021 are:
- Employers will be responsible for assessing an individual’s employment status, not the contractor/consultant.
- Small Businesses remain exempt from the reform. This means that if you are a small business employer, the contractors themselves still remain liable for ensuring they don’t fall under IR35.
Once the changes take effect, medium and large businesses will need to decide whether the IR35 rules apply to an assignment with individuals who work through their own limited company.
Where it is determined that the rules do apply, the business, agency, or third party that pays the individual’s limited company will need to deduct income tax and employee National Insurance Contributions (NICs) and pay employer NICs to HMRC.
The good news is that if your current contractor falls under IR35, HMRC will not carry out targeted campaigns into previous years when individuals start paying employment taxes under IR35. Businesses’ decisions about whether their workers fall within the IR35 rules will not automatically trigger an enquiry into earlier years.
So as an employer, what should I do?
If you engage with self-employed consultants or contractors, you will need to be prepared for the changes by taking some simple steps to ensure you don’t get caught out:
- Identify and review your consultant/contractor relationships.
- Ensure your terms of engagement with contractors and consultants are clear and accurately reflect their true status.
- Consider how the services are delivered, and by who, then potentially change contractors or consultants into employees, possibly with zero-hour contracts or casual worker agreements, with gaps between engagements to avoid continuity of service.
This is an opportunity to review what you have in place and how you operate. It will help you identify any issues and address them before HMRC do. It’s also a chance to ensure your staffing structure is fit for purpose and doesn’t expose your business to unnecessary risk.
If you need help to navigate these changes or to see how Ten Forward Finance can help your business, give us a call or drop us an email today.