Changes to ‘Off-payroll working’ (IR35): What do they mean for your business?
Changes to the intermediaries legislation aimed at contractors or “off-payroll” workers, known as IR35, are due to take effect from 6th April 2020. The intention of IR35 is to prevent the avoidance of income tax and National Insurance in situations of “disguised employment”. IR35 applies where contractors personally perform services to businesses through an ‘intermediary’ (typically a personal service company) but, if the contractor had instead been engaged directly by the company, they would be considered an employee of the company for tax purposes.
The changes will potentially impose significant new tax and tax accounting liabilities on companies paying intermediaries. It is therefore vital that your business is fully prepared for the changes due to take place next year.
What are the changes to IR35?
From 6th April 2020 the IR35 rules are changing for medium and large businesses in the private sector. The responsibility for identifying employment status will no longer rest with the intermediaries themselves, but will instead pass to the companies that engage their services, together with the obligations to make PAYE deductions and pay NI contributions where “deemed employment status” is found to apply. These provisions will replicate the rules which since 2017 have applied to public sector organisations.
Under the new rules you will have to determine the employment status in every case where, from April 2020, you engage a contract worker through an intermediary, and record this decision in a ‘status determination statement’. You will have to issue this statement both to the contract worker and the organisation which you contract with (the deemed employer). There is also a mandatory process to follow if the contract worker or the deemed employer disagrees with your decision.
If as the result of this assessment your business has ‘fee-payer responsibilities’, you have to calculate the ‘deemed direct payment’ and make the necessary PAYE deductions for tax and NI. You also have to pay employer NI contributions and, if applicable, apply the apprenticeship levy.
What should you be doing to prepare?
The first step is to work out whether your business will be affected by the changes to IR35, as a medium or large business (‘client’).
There is an exemption in the IR35 legislation for businesses which fall within the definition of a ‘small client’, such as companies which are small companies under the Companies Act 2006:
To qualify as a small company, at least two of these criteria must apply:
- Annual turnover is not more than £10.2 million;
- Balance sheet total is not more than £5.1 million;
- Average number of employees is not more than 50.
If your business is in scope, you should:
- Designate an “IR35 team” within the business, who will take responsibility for implementing the new rules, providing this team with suitable training and support.
- Undertake a comprehensive audit of your engagement of contract workers and the underlying contractual arrangements, identifying where individuals provide their services via personal service companies or other intermediaries.
- Carry out the required assessment in each case to decide if IR35 applies, and issue the status determination statement.
- Use the assessment process to identify any latent employment law risks in relation to the engagement and any other practical implications of IR35 applying.
- Consider whether in future it would be preferable to engage the contractor directly as an employee, for example under a fixed-term employment contract.
- Review both the commercial terms and the legal drafting of your contractual arrangements with contractors.
How can Cripps Pemberton Greenish help?
Our employment team has the expertise to provide you with strategic advice and guidance on the implementation of the new IR35 rules and their practical implications for your business. We can also assist you in the case-by-case process of assessing the deemed employment status of your “off-payroll” workers, and the documentation this process requires.
We can offer a range of different services tailored to the particular requirements of your business, and can agree fixed fees with you for these services:
- Review of the working arrangements which you have with your contractors and consultants.
- Assistance with documentation for the status determination statement and appeal process.
- Review and updating of your template contracts with contract workers.
- Guidance documents to assist your IR35 team, in particular the factors to consider when determining a contract worker’s deemed employment status.
- Coaching sessions to your IR35 team.
- Carrying out the IR35 status determinations on your behalf.
- Advice on associated employment law risks in relation to your contract workers.
- Drafting employment contracts if you decide to employ contract workers directly.
With our support you can ensure that your business is fully prepared in good time for the IR35 changes.
Please contact a member of our employment team to request an initial consultation to discuss your business needs and the particular services which we can offer you.