UPDATE (18 March 2020): In response to pressures arising from the Covid-19 pandemic, these rules are now set to come into force on 6 April 2021, a year later than planned (and reported below).
What are the new off-payroll rules?
Those familiar with IR35, which came into force in the year 2000, will know that the rules aim to ensure the correct tax and national insurance (NI) are paid by contractors who are employees in all but name.
The new regime requires businesses engaging contractors via their personal service companies (PSCs) to consider whether that contractor would look like an employee, if there were no intermediary PSC. That being the case, the business must deduct tax and NI contributions from all payments made to the PSC after April 2020.
While large and medium-sized companies are affected, small businesses are exempt if they satisfy two of the three qualifying conditions:
- Fewer than 50 employees
- Turnover of £10.2m or less
- £5.1m or less on the balance sheet.
It’s important to note that the applicability test applies on a group basis. For a group company to be considered a small company for these purposes, its parent company must also qualify as a small company according to the above criteria.
My business is not exempt. What should I do now?
Ensure that a designated individual within your organisation takes responsibility for understanding the regime and coordinating its implementation. It’s a job that’s likely to fall to someone in HR.
That person will need to take the lead in ensuring that all departments within the business are aware of the impact of the rules and resulting changes to processes or decision making.
Of course, it would be relatively straightforward if all contractor arrangements were dealt with centrally via HR or a procurement team. But where that’s not the case, ask yourself:
- Who has an overview of what’s going on in each department?
- Do departments inform anyone else when they enter into contracting arrangements?
- What do those arrangements look like?
Your designated individual may have to delve deeper into your commercial department, and perhaps also payroll and accounts, in order to review each and every engagement with a contractor, and uncover those that are made via an intermediary PSC or agency.
A review of each worker’s contract will need to be undertaken, considering the way it applies and operates in practice. You’ll need to run the various tests of employment, such as: control (for example, the ability to refuse or accept work); personal service and the right of substitution; use of or provision of own equipment; how payment is made (and whether remuneration is calculated on an hourly/day/monthly basis); degree of integration in the business (does the person have a company email account? do they manage anyone?) and: the ability of the contractor to make profits or losses.
If there is a deemed employment, tax and NI contributions must be deducted from all payments made to the PSC for services provided on or after 6 April 2020.
You may choose to use the Government’s new online tool for determining employment status, known as the Check Employment Status for Tax (CEST) test. As long as you are truthful with the data you input, HMRC will be bound by the result. Don’t forget to save and print the result!
The reviews are done - what next?
Before you start to make any deductions, you’re obliged to inform the individual (and any intermediary agency) of your decision in a status determination statement (SDS).
From April, the individual will be able to appeal an SDS. Businesses then have 45 days to review the decision and respond – either confirming the original decision or issuing a new SDS.
Then it’s time for housekeeping: the contractor needs to supply the details necessary to make those deductions (where applicable) and you’ll need to instruct payroll to do so. Some extra things to do or consider include:
- Adapting your systems with electronic or manual flags to ensure that gross payments aren’t made in error.
- Issue the deemed employee with a P45 on conclusion of the engagement so they can enter the details in their tax return.
- Issue a P60 at year end.
- Diarise reminders to review all contractor arrangements periodically to capture new engagements and those that may have changed.
What are the cost considerations of IR35?
The process of carrying out the reviews of existing contractor arrangements within your organisation could use up considerable human resource.
Findings of deemed employment will mean an increased cost to the business too.
You may be able to reduce outgoings by considering alternative arrangements, such as:
- Entering into fixed-term employment contracts
- Engaging only with contractors directly (i.e. not through a PSC)
- Negotiating lower hourly rates with PSCs.
Where a contract is made directly between your business and the worker, normal IR35 rules apply to determine whether the contractor should, in fact, be treated as an employee.
To discuss your IR35 questions with an expert, please get in touch with Natalie Ward in the Employment team, who advises clients in Bristol, Bath, Swindon and the wider South West.
