A global pandemic. Brexit. Trying to deal with day-to-day operational demands along with all of the challenges arising from tier restrictions and lockdowns. With so many issues demanding attention over the past few months, it would not be surprising if some employers have overlooked the fact that the delayed private sector IR35 regulations, affecting the engagement of contractors, come into force this April.
Indeed, the signs are that quite a few employers are not yet ready for them. This recent survey found that more than half of the contractors asked were still waiting to have their status assessed. The research also suggests that nearly a quarter of contractors have clients who are intending to impose blanket bans on the use of limited company contractors. But this approach is not without risk either, potentially preventing companies from accessing specific skill sets at least in the short to mid-term if not beyond.
All the implications of IR35 must be carefully thought through to ensure compliance while also avoiding the loss of any key contributors to business activity.
A brief overview of IR35
IR35 was introduced in 2000 to reduce tax avoidance by ‘disguised employees’; the legislation was designed to target the tax affairs and national insurance of contractors who effectively worked in the same way as employees, but who supplied their services via an intermediary for greater tax efficiencies.
It did not have the intended impact however so was subsequently modified. While it was previously down to the contractor to define their own status, the IR35 regulations now shift that responsibility onto the engaging company. Already introduced in the public sector in 2017, the changes had been due to take effect in private sector medium and large-sized organisations, as defined in the Companies Act (2006) in April 2020. However, due to the pandemic, the introduction was postponed until 6th April 2021.
The regulations apply to the services provided from the 6th April onwards. If services were provided before this date, even if payment wasn’t made by the 6th, they are not affected (unless there is reason to believe there could have been criminal behaviour or fraud). Any engagements ongoing across the introduction date will only have the rules applied from the 6th. Engaging companies will need to confirm their exemption if they are classified as a small company.
The indications are that HMRC initially intends to take a sympathetic approach to payment of penalties in the case of inaccuracies, other than if there is evidence of intentional non-compliance. That doesn’t mean companies should delay. It’s important to be ready by April – and if your company isn’t already working towards compliance, you need to start straight away to give yourself enough time.
Key actions companies need to complete
Identify all contractors working within your company who are expected to be engaged on/beyond the 6th April 2021
Carry out contractor assessments on a case-by-case basis to identify which ones will be inside IR35
While there are 3 core criteria, there are other factors that should also be taken into account. In-depth guidance can be found on HMRC’s online Check Employment Status for Tax CEST tool. While the tool has come in for some criticism, including claims that in a significant number of cases it has been unable to determine employment status, it does provide an important indication of the HMRC approach. The Employment Status Manual is another helpful resource that can be used as part of an interview to establish the status of a worker.
Calculate tax and NI payments
Once you have established who is likely to be covered by the IR35 rules, calculating the potential cost of tax and NI payments will be beneficial for then deciding next steps.
Communicate the outcomes and be prepared for some disagreement
Plan how you will handle any disputes that arise. There may be contractors who challenge the outcome of the IR35 assessment – most likely if it’s found they are inside it, putting them in the position of being taxed as employees while not having the benefits afforded under employment law. They might decide to seek opportunities elsewhere.
It’s therefore wise to identify key individuals for whom some form of retention strategy needs to be in place – perhaps an increase in contract rates or even an offer of an employment contract. Termination notices must also be served in time.
A Status Determination Statement (SDS) must be given to every contractor who is going to be engaged from the 6th of April. Make sure all future contracts are updated to reflect IR35 going forward too.
Time is running out for companies
Despite a possible initial period of a lighter touch from HMRC, non-compliance will ultimately lead to financial penalties, retrospective payments needing to be made and damage to business reputation. Companies that have not as yet addressed their obligations under IR35 must act now to make sure they are ready in time.
The work involved in IR35 illustrates the importance of businesses having accurate, detailed and up-to-date HR and payroll records in place. To learn more about the services we offer, and to find out how we can support your business, please contact us.