It has been announced that the planned IR35 tax reforms for April 2020 will now be delayed by one year to 6th April 2021 in an effort to protect the economy following the Coronavirus outbreak.
Whilst this provides a welcome breathing space for many – you need think carefully about whether you’ve gone beyond the point of no return and be wary of reversing IR35 decisions that you’ve made. Consider:
- Were decisions conditional upon the new legislation coming into force?
- Did the contractor appeal or could they appeal now arguing that they are outside IR35?
- Risks of reversing decisions about a contractor’s IR35 status (tax avoidance and under the Criminal Finances Act) given that evidence of your status determination would be relevant in the event that HMRC audits you or the contractor’s business.
5 Steps for Preparing for IR35
Step 1: Decide if you are classed as a ‘small company’. If you are then you are exempt from the off-payroll working rules for now and IR35 still applies as it did before i.e. if they have one, a worker’s personal services company (PSC) carries the risk.
A company will be classed as small if it has at least TWO of the following:
- Turnover of £10.2 million or less
- £5.1 million on its balance sheet
- 50 employees or less (measured by average no in a tax year)
Please note, if you are a UK subsidiary of a larger group with a foreign parent this could affect your small company classification – you could be caught by the new rules.
Step 2: Identify which of your contractors are currently providing services through intermediaries (through their own PSC or through an agency or umbrella company). This is a useful exercise in case you have had contractors working for you for a while and may not have a clear paper trail in place i.e. you may think they’ve got a limited company when in fact they are self-employed.
Step 3: Review the status of all existing contractors. This means you need to review the status of all contractors identified in step 2. Please note you should check on a regular basis if any self-employed workers are genuinely self-employed as the risks for them are significant in this situation in the event of an HMRC audit.
– you might want to consider using CEST – HMRC’s service to Check Employment Status for Tax (CEST) (https://www.gov.uk/guidance/check-employment-status-for-tax) or engaging with professional advisers.
Step 4: Analyse the results:
- They are already PAYE – e.g. umbrella company worker – ask the umbrella to provide evidence of this. (N.B. under the new rules, ensuring compliance in the supply chain is on the client too so they should check that the umbrella is actually operating PAYE e.g. asking for payslips.)
- They are working through a PSC and the result shows they are outside IR35 – no change is needed but keep under regular review
- Their status is grey or undetermined – e.g. can changes be made so they are outside scope?
- They are working through a PSC inside IR35 or their status is grey or undetermined and can’t be changed to make it outside scope:
- Assess if they are business critical
- You will need to change their pay structure
- PAYE and NICs will need to be deducted at source so your costs will increase and/or the worker will receive less money
Step 5: Process and education:
- Set up a process for status determination and challenges for existing workers and ensure existing contractors have been assessed pre-April 2021
- Consider how processes for new hires might need to change post April 2021 (for example core roles are assessed in advance)
- For new hires ensure those with responsibility for hiring (both internal and external) have a process for determining status and train them on it
- Review and make changes to your contractor agreements, contracts with agencies and umbrellas – to cover where the contractor is inside IR35 and to ensure compliance.
If you need help preparing for IR35 or have any questions please get in touch with us today