The government have announced a delay to IR35 in light of the Coronavirus outbreak. The legislation is now planned to go ahead on 06 April 2021, giving businesses and contractor more time to prepare. Understandably there are a lot of questions that need answering, set against an uncertain backdrop which is changing regularly.
At People Group we offer a range of payroll services, optimised to help you retain talent and to realise previously unseen efficiencies to help minimise any impact of IR35. Find out more about IR35 below or get in touch to see how we can help.
Watch our 3 minute video for a brief overview of IR35 and its impact for your business.
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What is IR35?
IR35 often referred to as ‘The Intermediaries Legislation’ or ‘Off-Payroll Legislation’ has been in force since 2000. It was created to take away the tax advantages of individuals providing services through a limited company who are not strictly in business of their own account. In other words, the rule is aimed at so called ‘disguised employees’ – people who are providing a service to one client and whose working practices mirror those of a traditional employee.
However, it’s only in more recent years that the government has given the legislation real teeth.
The government clamped down on ‘off-payroll working’ in the public sector in April 2017. Public sector clients became responsible for working out whether their workers were caught by IR35. Any workers subject to IR35 would have to have PAYE tax and NICs deducted at source. To help employers and workers decide if IR35 might catch them, the government introduced an Employment Status Test to mixed reviews.
Why is it important?
From April 2020 if you are a business that engages with PSC (Personal Service Company) contractors to complete projects, you’ll need to be sure you are engaging in the correct way. Responsibility for determining a workers tax status will now rest with the end client (or closest party to the PSC e.g. a recruitment agency). Businesses found to be engaging contractors incorrectly will become liable for any unpaid tax, where previously the liability rested with the contractor.
Who does it affect?
Off payroll will affect any business in the UK who engage contractors through an Ltd Company and who meet the business size criteria set out by HMRC. It will therefore also have an impact on any contractor who is providing their services to such businesses via their Personal Service Company (PSC).
How do we determine our IR35 status?
HMRC designed, and have since revamped a tool called CEST (Check Employment Stats for Tax) to assess contractors’ IR35 status. CEST is available online and requires PSC contractors to answer a series of questions relating to the way they carry out their work. IR35 status can also be determined through a number of different independent accountancy service providers. The results of these tests will generate the required Status Determination Statement which confirms the deemed IR35 status for tax purposes.
What are the next steps we should take?
If you are just starting to prepare, the first thing to do is assess your workforce to identify any contractors engaging through a Personal Service Company (PSC). Once you’ve identified these, you need to speak with them and decide how to best determine their IR35 status (CEST or independent review). Until you know who may be affected you’ll not be able to make contingency for the skills you need to carry on with business as usual.
Payroll options for contractors caught by IR35
There are the three key options available:
Bring contractors in-house. This option assumes your contractor would be willing to forgo the tax advantages enjoyed as a self-employed contractor. The upside is that you retain your talent. The downside is that you are adding to your employer responsibilities by way of legalities and insurances etc.
Engage an umbrella company for ‘caught’ contractors. This would preserve headcount but there is a cost implication. Higher agency costs, lower gross pay, more tax and lower net pay are all unavoidable by-products of an umbrella company compared to a private limited company.
Partner with a Professional Employment Organisation (PEO). This model is built around the HMRC recognised joint-employment method and carries a multitude of benefits. The PEO becomes the ‘employer of record’ and takes on all the usual employer responsibilities leaving your business to carry on using your contractors without adding to your employer liabilities.
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