IR35 is Back!
The IR35 tax reforms originally planned for April 2020 came into force on 6th April 2021. Despite the pressures on business caused by Coronavirus it seems highly unlikely that HMRC will delay further.
Don’t delay – now is the time to double-check if you are affected.
Who does it affect?
They apply to medium to large businesses – not small businesses. If your business is classified as small, then the changes won’t concern you and it will remain the limited company contractor’s responsibility to assess status for tax and determine whether they are inside or outside IR35.
To recap – you are classed as a ‘small company’ if you satisfy at least TWO of the following:
- Turnover of £10.2 million or less
- £5.1 million on your balance sheet
- 50 employees or less (measured by average no in a tax year)
Where a small company is part of a larger group of companies (including where there is a foreign parent) it is the group turnover and revenue that will need to be considered – not just the turnover and revenue of the UK subsidiary. If you fall into this category you should take advice now.
Contractors won’t be affected by IR35 if they supply their labour directly to the client without using a limited company (e.g. as a sole trader). However, you still need to check they are a bona fide contractor, not a worker or employee. Click here for more information on determining an employment status.
Contractors who are not tax residents in the UK and who are supplying their services exclusively outside the UK are also unaffected. If they are supplying some services inside the UK, the position is more complex and you should consider getting advice on this.
What you need to do now?
Step 1: Identify if you are a business covered by the new rules.
Step 2: If yes – identify which of your contractors are currently providing services through intermediaries (through their own company or through an agency or umbrella company). This is a useful exercise in case you have had contractors working for you for a while and may not have a clear paper trail in place i.e. you may think they’ve got a limited company when in fact they haven’t.
Step 3: Review the status of all existing contractors identified in step 2.
– you might want to consider using CEST – HMRC’s service to Check Employment Status for Tax (CEST) or engaging advisers to help because, unfortunately, CEST commonly produces an inconclusive status result.
Step 4: Analyse the results:
- If they are working through a limited company and the result shows they are outside IR35 – no change is needed, but keep this under regular review
- If their status is grey or undetermined – e.g. can changes be made to the way they work (i.e. not just changes to their contract) so they are outside of scope?
- If they are working through a limited company intermediary inside IR35 or their status is grey or undetermined and this can’t be changed to make them outside its scope: –
- Assess if they are business critical
- If yes – you will need to change their pay structure – PAYE and NICs will need to be deducted so your costs will increase and /or the contractor will receive less money
- If the contractor is already PAYE – e.g. umbrella company worker – ask the umbrella to provide evidence of this. (N.B. under the new rules, ensuring compliance in the supply chain is on you too so you should check that the umbrella is actually operating PAYE e.g. ask for payslips.)
Step 5: Process and education:
- Ensure existing contractors have been assessed pre-April 2021
- Set up/ make changes to your processes for new hires to ensure their status is determined at the outset (e.g. core role assessment is done in advance)
- Ensure those with responsibility for hiring (both internal and external) are trained on the process for determining status
- Review and make changes to contractor agreements, contracts with agencies and umbrella companies to ensure they are responsible for compliance