What is IR35?
IR35 is a set of UK Tax legislations that relate specifically to off-payroll working e.g contractors or anyone who is paid outside of the company’s payroll.
These rules are designed to combat tax avoidance by workers and the firms hiring them by ensuring that individuals who work like other employees, but through their own company or other intermediary, pay the same Income Tax and National Insurance contributions as individuals who are directly employed. Further explanations are available here https://www.gov.uk/guidance/understanding-off-payroll-working-ir35
Contractor work can be considered to be either working inside or outside IR35.
What is classed as “Outside IR35”?
If a person is deemed to be working as self-employed then this is considered as outside of IR35 and it will be their responsibility to make sure that all personal and company taxes are paid accordingly and on time.
What is classed as “Inside IR35”
If the service provided reflects that of employment or the contractor is being treated as a full time employee or is receiving the same benefits of a full time employee then then this will be deemed as inside IR35. For example, a professional contractor that works at your offices full time, is expected to pick up an array of tasks rather than one specific project and has to request annual leave.
Where the rules apply, the business or agency will be responsible for deducting income tax and National Insurance contributions (NICs) via PAYE and will be required to pay employer NICs.
It is however possible for professional contractors to have a mix of contracts which fall inside and outside of IR35, and this could cause confusion for both parties involved.
You can check out whether a contract falls inside IR35 or outside IR35 by using HMRC’s check employment status for tax tool.
What is changing?
Since 2017, public sector organisations such as schools, universities, local authorities and government departments have been responsible for deciding if the off-payroll working rules should apply when contract workers provide a service.
As of 6th April 2021, these rules will be rolled out across the private sector placing new responsibilities on medium and large businesses who will be required to set the IR35 status of all contractors.
The private sector includes third sector organisations, such as some charities.
The rules will apply to all public sector clients and private sector companies that meet 2 or more of the following conditions:
- you have an annual turnover of more than £10.2 million
- you have a balance sheet total of more than £5.1 million
- you have more than 50 employees
Changes to the rules were originally due to come into force on 6th April 2020, but were delayed due to the pandemic until 6th April 2021 to provide extra time for contractors and employees to prepare.
How will this affect recruitment?
In order to prepare for the roll out of the new changes to IR35, organisations are being encouraged to take a number of strategic steps as outlined in an article published in the HRD Magazine in June last year.
These include conducting a full review of all staff and contractors currently working in the business, reviewing existing contracts, assessing the financial impact of employing contractors as opposed to employees and reviewing, and where appropriate, amending their recruitment processes as required.
Here are a few considerations:
- Ensure your adverts are clear
When it comes to the recruitment of new workers, businesses are required to make it explicitly clear that the role is for a contracted period of work for a self-employed contractor or a more permanent role as a consultant or contractor in the capacity of an employee.
Each organisation will need to consider which approach is right for them but by adding it to your advert you will ensure that anyone applying for the role will understand whether or not they will be impacted by the IR35 rules and that payroll can be completed correctly from the outset.
- Speak with your agencies
If you use an agency and an assignment or contract falls within IR35 you will need to know if the agency concerned has the resources to pay PAYE if needed or if will they outsource this to a payroll provider. Keeping your own record of how each assignment will be managed will undoubtedly help should an issue arise.
- Record the IR35 status of all new recruits
Whether you record the IR35 status as part of your vacancy authorisation or elsewhere in the recruitment process, businesses need a robust and compliant process that ensures the necessary information is documented for every recruitment.
- Clearly communicate your terms of engagement
Reiterating the terms of engagement during the offer and onboarding process will help ensure that the workers are aware of any financial implications as a result of the IR35 Status. Having the right documentation and procedures in place is essential for both employers and individuals alike.
- Update your reports
If you are recording the status of each of your vacancies as part of your recruitment process then you should also be able to report on this. Make sure your reports are updated and you can easily access the information you need to manage your costs and achieve your recruitment objectives.
Creating the necessary key reports will not only allow you to quickly identify roles which fall within IR35 but also manage the number of roles in line with your policies or KPI’s. It is good practice, like with all reports to then reflect on these periodically to ensure they serve the intended purpose.
Whether a company is ready for the IR35 changes or not, the rules will come into place on 6th April 2021. Companies need to consider how this is going to affect their businesses and what documents and processes need to be implemented.
However before making any changes, it is important to seek expert advice from legal professionals to ensure that your business not only complies with IR35 but also other laws and regulations that could be impacted.
The government website also has lots of information you may find useful : https://www.gov.uk/guidance/understanding-off-payroll-working-ir35
Here are networx we are supporting clients across the UK as they look to address the key issues as a direct result of IR35. For further information please contact usBack to blog page