The Government’s changes to IR35 come in to effect on 6 April 2020. IR35 is the collective term for off-payroll staff, and the changes mean that businesses will become responsible for assessing the employment of any IR35 workers that they engage.
The rules are intended to ensure that individuals who are working in the same manner as employees are paying roughly the same employment taxes as those that are classed as employees.
Off-payroll working rules only apply when an individual provides their services through an intermediary to the client or individual.
HM Revenue & Customs (HMRC) refers to workers in this category as “disguised employees” because they do not meet their definition of self-employment, and as a result, the correct figures for tax and National Insurance (NI) are not paid.
Contractors and those who work in a freelance capacity often fall under these descriptions, but what does it mean for the agencies and businesses that employ them?
Guidelines to the reforms
HMRC’s guidelines officially state “From 6 April 2020, the responsibility for assessing whether IR35 applies will shift from the individual to the end client, recruitment agency or another third party engaging with the worker.”
Businesses will be able to use the Check Employment Status for Tax (CEST) service, which helps to determine whether the off-payroll working rules apply. However, HMRC has been forced to admit that this tool is only accurate in around 85 per cent of cases, so seeking additional outside help may be beneficial.
There are key considerations for businesses when determining the status of an employee. These include how the worker is paid, if they are directly receiving any benefits or expenses, what their responsibilities are and who controls them (where do they work, when, how).
It is important to note that these rules will only apply to medium and large businesses. Workers in small businesses will be exempt, meaning that they will continue under the current system, with the responsibility for determining IR35 remaining on the workers.
These rules will be the same for workers hired via a recruitment agency, as HMRC confirmed in their March 2019 consultation.
What agencies need to do to prepare
Agencies may need to help end-user clients prepare for the changes. In order to do so, they need to be prepared as well.
Contracts represent an element of control that a business or recruitment agency has over an employee, and those contracts usually stipulate exactly what control is in place. This could be the place of work, the number of hours worked or any specific uniform or clothing that must be worn.
If these controls are evident, then HMRC may assume that although the worker appears to be self-employed via their own private service company, that they are in fact an employee of the business.
In this instance, it may be prudent to review your contracts if you wish to maintain relationships with contractors, particularly to ensure that their roles and responsibilities are far enough removed from the business to be classed as genuinely self-employed.
Protecting the legitimately self-employed is a key factor, with HMRC keen to ensure that IR35 does not target self-employed workers.
It is essential that you review contracts, with some employers using a blanket agreement to include all contractors under IR35 rules, which has included some workers that should not have been within the IR35 rules.
To avoid employment tribunals and potential litigation, it is pivotal that you seek professional advice to ensure that your contracts are correct and fair.
For businesses working out how many workers will be bound by IR35, it is imperative to also consider the costs involved.
Employer’s National Insurance Contributions could increase the costs to the business, meaning that employing the consultant or contractor is no longer financially sustainable.
It could be that terminating contracts in a responsible manner prior to the rules coming into effect is a more prudent decision for your business.
Seeking professional advice can help alleviate the burden of this preparation, ensuring that cost analysis and necessary cessation of contracts is completed in a legal and professional manner.
New recruitment procedures
It is important that businesses and agencies also consider their position when recruiting. For new workers, adverts should clarify whether the role is a permanent internal role or if it is for a contracted period of time to be carried out by a self-employed worker.
If you are clear from the beginning, it will simplify the entire process. The worker will be clear about their position and they will know whether they will come under the IR35 rules or not.
Preparing if your company has agency workers
For companies with agency workers, preparing is pivotal. Contracts will need to be organised to ensure that Income Tax and National Insurance Contributions (NIC) are deducted prior to the deemed agreed payment being made.
Organising contracts for IR35 if your company has agency workers is an important process. Businesses will be responsible for assessing the individual’s employment status. If the rules apply then either the business or the agency that pays the individual or their limited company must deduct income tax, the employee’s National Insurance Contribution (NIC) and pay employer NICs to HMRC.
The qualifying factors for a business to be classified as small are expected to be;
- Turnover not more than £10.2 million
- Balance Sheet not more than £5.1 million
- No more than 50 employees
This means that the reform will not apply to the 1.5 million smallest businesses in the UK. However, medium and large businesses will need to decide whether the IR35 rules apply to any engagement with individuals who work via their own limited company.
It is important that you have clarity on the new IR35 rules. Contact us today for expert professional advice, to tighten up your contracts and ensure that your business is compliant ahead of the IR35 changes.