IR35 reform; is your company ready for April 6th, 2021?
IR35 is about to change, is your company ready?
The government decided to postpone the IR35 rule changes as Covid kicked off and the world came to a grinding halt. But, as of April 6th, the changes will kick in and, it would appear that, most businesses aren’t ready for it.
Here’s the big change …
As of April 6th medium and large-sized companies in the private sector will be responsible for assessing the employment status of their contractors.
Boom, just like that it’s down to contracting companies to ensure that their organisations stay compliant.
IR35 isn’t easy and the deadlines are set in stone, edged in red ink and burned in place. Despite that, very few companies are prepared. A research study led by management consultancy Sullivan & Stanley revealed that 71% of private sector firms were not aware of the significance of the forthcoming update. More than half (52%) also said the rule changes were ‘contradictory or confusing.’
What is IR35 – and what is changing?
IR35 is a tax law designed to prevent tax avoidance by contractors working for their clients via an intermediary, such as a limited company or personal service company. The idea behind the new rules is that it will prevent contractors from disguising their real status as an employee and therefore not paying necessary income tax and National Insurance contributions (NICs).
From 6 April 2021, medium and large-sized businesses in the private sector will be responsible for calculating and deducting income tax and NICs for any contractors that fall within IR35 rules via the PAYE system. Similar rules have applied in the public sector since 2017.
It’s important to note that the new update only applies to medium and large-sized businesses as defined by the following criteria in the Companies Act (2006):
- Annual turnover is more than £10.2 million
- Balance sheet total is more than £5.1 million
- More than 50 employees
If your business meets two or more of these conditions, then you will need to ensure full compliance with the upcoming changes to IR35 and prepare to determine the employment status of any contractors you work with.
Get Ready for IR35
Getting compliant will take a team effort between HR, Finance and Payroll, but it is essential to ensure you are fully compliant to avoid penalties. Here’s a quick overview of what needs to be actioned.
Carry out a full audit of your contractors
The first step for any finance department is to conduct a comprehensive review of the contractors their organisation currently works with. Sounds easy, but not every company has a centralised database of all their contractors. Time to get one in place!
Determine which contractors will fall inside IR35
Employers must assess the IR35 status of every contractor on a case-by-case basis. HMRC have issued three fundamental criteria when determining which workers fall inside IR35 – ‘personal service and substitution’, ‘supervision and control’ and ‘mutuality of obligation’ – though there are also many supporting factors that must be considered. Detailed guidance on this can be found via the Government’s CEST tool.
Calculate accurate tax and NI payments
Once finance and payroll departments have a clear idea of which contractors fall within IR35 rules, they can then start calculating the potential cost of tax and NI contributions they would be due to pay as an employee. Having full visibility of these costs ahead of time is a huge benefit for both employers and contractors and helps determine the best course of action for all parties going forwards.
Prepare new policies and agreements
From April 2021, employers will need to provide a Status Determination Statement (SDS) to every contractor they intend to keep working with. Employment contracts and working agreements should also be updated to clearly communicate all IR35 criteria and implications when engaging the services of a new contractor.
Like it or not, fair or not, these changes are coming into place and time is running out. Whether intentional or not, employers that fail to comply with the new requirements from HMRC will very likely find themselves facing penalties for unpaid tax and NICs, as well as significant reputational damage in the eyes of contractors and key stakeholders.
If you need help or guidance, please contact us today.
We’re here for you.