IR35 LATEST: What it means if you hire contract workers
Updated: Sep 11
From 6 April 2020, the revised off-payroll working legislation (IR35) will apply to large and medium-sized private sector organisations. From payroll management through to recruitment best practice, this rule change will have a significant impact on businesses that rely on contract workers.
Under the new regime, responsibility for determining a worker’s employment status shifts from the IR35 contractor to the hirer. What’s more, where a worker is assessed as falling within the IR35 rules, it is the fee payer’s responsibility to account for PAYE and NICs.
Here, we take a closer look at what this means for your contractor relationships and your wider business – both in the run-up to April and beyond.
Will the changes to IR35 apply to my business?
IR35 is designed to address the perceived issue of “disguised employment”; in other words, relationships akin to employment where workers bill for their services via an intermediary (usually their own limited company), resulting in a lower tax and NI liability.
In 2017, the IR35 rules for the public sector were overhauled, essentially to bring about a shift of liability from the worker to the hirer. From 6 April 2020, a similar regime will apply to the private sector.
The rules cover situations where the contractor is operating through an intermediary. In most cases, this will be a limited company (generally referred to as a personal service company), but an intermediary could also be a partnership, LLP, managed service company – or even another individual. The changes feature two main elements that businesses who hire contractors need to be aware of:
1. Status determination
Previously, it was up to the contractor to determine their own IR35 status. Under the new system, IR35 status determination is the responsibility of the organisation using the worker’s service (the ‘end user’).
2. Tax and NIC accounting
Where the arrangement has been assessed as falling within IR35, responsibility for calculating and deducting tax and national insurance rests with the organisation responsible for paying the intermediary for the worker’s services (the ‘fee payer’) under PAYE. Usually, the fee payer and end user will be the same business. A notable exception to this is where the worker is hired through an agency – and it’s the agency that pays the fees into the worker’s company.
Small business exemption
The new IR35 private sector rules only apply to medium and large businesses. To be exempt, an incorporated business has to fall within the definition of ‘small company’ set out in the Companies Act 2006. For unincorporated businesses, a flat turnover threshold of £10.2 million applies. Unincorporated organisations with an annual turnover lower than this level are exempt from the rules.
For further information on the rules as a whole, take a look at our comprehensive guide.
IR35 Preparation: Review Your Current Arrangements
As the implementation date draws closer, businesses should carry out a full audit of all existing contractor arrangements to determine whether they fall within IR35.
The starting point for this audit should be HMRC’s Check Employment Status for Tax (CEST) service. With this tool, you are invited to enter key information about the nature of the contractual arrangement and working practices. CEST then provides you with HMRC’s view on whether IR35 applies and whether the worker should pay tax under PAYE.
So will CEST be able to give you a quick, reliable answer on IR35 applicability in all cases? Not necessarily. In fact, HMRC’s own figures from last year point to a significant minority (15%) of cases where CEST could not generate a definitive answer and where further review was needed. One particular risk for businesses is the doubt over whether the tool is sophisticated enough to take into account sector-specific details concerning working arrangements.
When using CEST, it is also vital to avoid the risk of inadvertently inputting incorrect or misleading information. This can lead to the initial determination being overturned, potentially triggering a demand for unpaid taxes, interest and a possible sanction.
Tip: alongside usage of the CEST tool, a professional contract review service can go a long way in helping you avoid errors and ascertain the correct status for workers.
PAYE Enrolment: Calculating the Cost
After an audit, you have identified a number of arrangements that will fall under IR35. So what happens next?
In this situation a hiring business has two basic options:
Seek to review and amend the existing contracts, roles and responsibilities so that the workers concerned no longer fall within IR35
keep the arrangements as they are and add the workers to your payroll.
On first glance, the latter option may seem the most straightforward way ahead. That said, be aware that it means paying employers’ NICs for these workers. You or your accountant should ideally carry out a review of the additional costs associated with this to determine whether the contract arrangements are still financially viable.
You should also think about the additional administrative burden of adding a large swathe of workers to your payroll for the first time. Is your current payroll process fit for purpose? For hassle-free implementation, this could be the ideal time to consider outsourcing to a dedicated payroll service.
Beware the blanket approach
If one of our contract workers falls within IR35, then surely they all do?
Avoid making assumptions about your workers without assessing their individual arrangements. Failure to exercise reasonable care in determining a worker’s status can lead to fines, demands for back payments – and possible litigation from workers themselves.
Clarity is Key
For any business that hires contractors, one of the biggest risks associated with IR35 is to sleepwalk into an arrangement you did not intend to enter.
Let’s say you need to draft in additional assistance for a time-limited project, with no desire on your part to add the contractor to payroll if you can possibly help it. To maximise the likelihood of the arrangement staying outside of IR35, be sure to give careful consideration to the contract and specific working arrangements. For instance, are you purporting to exercise close control over matters such as specific hours worked, locations and provision of equipment? If so, then depending on your organisational requirements, it may be worth amending these terms to place sufficient distance between the worker and your business to highlight their self-employed status.
Your recruitment material is another area that demands clarity on employment status. Potential recruits should be able to tell from your job listing whether they will be engaged on a purely self-employed basis, as a contractor under the IR35 rules or as an employee.
With just six months to go to implementation, one recent poll suggests that three-quarters of private sector organisations are yet to prepare for the new off-payroll rules.
To absorb the changes with a minimum of disruption, now is the time to review your existing contract arrangements, to consider possible contractual amendments and to liaise with contractors. For expert help and advice on all aspects of IR35 preparation and implementation including contract reviews and payroll management, speak to MJH Accountancy today.