As soon as the new legislation comes into effect, medium and large-sized organisations in the private sector will be responsible for assessing the employment status of their contractors. This marks a significant change from the current rules and places extra responsibility in the hands of finance and payroll professionals to ensure their organisation stays compliant at all times.
The challenge with IR35 lies in its complexity and changing deadlines, so it’s hardly surprising to find just how few organisations are prepared for the reform. 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.’
Here at Access, we work closely with private sector businesses to ensure full corporate governance and compliance with IR35 through our Access Contractors solution. Clients often ask us to help simplify the implications of the new changes, which is why we’ve created this short guide to explain everything their finance and payroll teams need to know prior to the update. However, if you’re already fully up to speed with the changes ahead, you can get in touch with our team to discover how our new Contractors solution can support you.
What is IR35 – and how is it 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.
Your essential IR35 checklist
Finance, payroll and HR leaders play a key role in ensuring their employer is fully compliant with the new IR35 legislation and avoids the impact of non-compliance. This quick checklist is a good starting point to ensure you are covering all angles ahead of April 2021:
- 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. This can be quite a challenge in itself, particularly if the business does not keep an accurate record of all contractor information in a centralised system.
- 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 your 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.
- Avoid the costs of non-compliance – 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.
Need help with your IR35 compliance?
For finance and payroll teams in medium and large-sized companies, the task of determining and maintaining IR35 status for every contractor working with their organisation and ensuring full compliance is not easy.
Most would benefit greatly by having a simple tool like Access Contractors in place, providing teams with one place where they can quickly assess worker status, calculate accurate payments, maintain a record of historical payments, receive notifications on areas for investigation and remove any threat of human error.
Another key benefit with this tool is that it’s completely standalone, and implementation is straightforward, quick and secure. So regardless of your existing finance and payroll software, you can achieve compliance with IR35 quickly.
Get in touch with one of our friendly IR35 specialists to discuss your options ahead of April 2021 or book a software demo to see exactly how our Access Contractors tool can support your organisation.