Don’t forget about the IR35 off-payroll rule changes

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Written by: Alcumus
27th October

Many of us will have focussed on protecting our people and businesses this year. However, it’s important to remember changes such as the IR35 reforms on are still happening.

What is IR35?

IR35 contains the set of rules that govern employment status. They determine whether an interim contractor is:

  • An employee for tax purposes (where the PAYE tax rules should apply) or
  • An independent contractor which allows more freedom regarding how the contractor is paid and the tax that they pay.

What’s changing?

Although the IR35 rules and tests themselves are not changing, the legislation for changes to non-public sector organisations (as included in Finance Act 2020), has now received Royal Assent and responsibility for determining an interim contractor’s status will change on 6 April 2021, from the contractor to the end client (the hiring manager).

Reforms to IR35 legislation for the private sector were due to take effect in April 2020 but were delayed in April 2019 following panic and a backlash from freelancers and business groups who claimed that companies had not had long enough to prepare for its introduction.

At the time, a host of banks including Barclays, Lloyds and HSBC informed contractors that they would only be engaged if they went on the payroll and pay as you earn (PAYE).  Such demands meant significantly less take-home pay and reduced flexibility for those in the freelance community regarding how they would work.

Genuinely self-employed contractors are still treated as outside IR35 but if the contractor is deemed to be working “inside IR35” for an assignment (i.e. deemed to be an employee for tax purposes) then the employer will have a statutory duty to ensure that tax & national insurance (both employers and employees) plus apprenticeship levy are applied to their payments which will, of course, affect the cost of those contractors.

What can business do to prepare?

HMRC have always claimed that the aim of the IR35 legislation is to identify and combat tax avoidance in “disguised employment” by both workers and the firms hiring them. This is the practice of engaging a worker and treating them as self-employed when they should be classed as an employee.

You should therefore start preparing for the reform taking effect and it would be a good idea to do an audit of your contractor workforce.

The Check Employment Status Tax tool (CEST) is already available for organisations and contractors to consider the appropriate employment status for tax for contracts running beyond 6 April 2021.

We understand that more help will be available from HMRC next month.

If you have any further queries on this subject matter, please feel free to contact  the Alcumus PSM HR Consultancy team on [email protected].

Alcumus PSM (People & Safety Management) specialises in human resources (HR) and health and safety (H&S) consulting for small and medium-sized enterprises.

Written by Sally Grundy, Senior HR Consultant