Draft legislation was published in 2019 setting out significant changes to IR35. On April 6, 2020, the United Kingdom’s anti-avoidance tax law called Inland Revenue 35 (IR35), or “off-payroll working,” changes significantly for the private sector.
IR35 is a piece of legislation that allows HMRC to collect additional payment where a contractor is an employee in all but name. If a contractor is operating through an intermediary, such as a limited company, and but for that intermediary they would be an employee of their client, IR35 kicks in.
While there are several updates to consider, the liability for defining employment status now falls to the employer instead of the employee.
These factors might indicate that your employee is an independent contractor:
- Billing for services through a personal services company (PSC)
- Using their own limited business to pay themselves a small salary
- Receiving income classified as dividends, which are exempt from National Insurance Contributions (NICs)
- Paying less than 45% income tax on earnings
By contrast, full-time employees pay taxes and NICs up to 45% and 12%, respectively. In short, independent contractors, also referred to as “disguised employees,” with the same roles and responsibilities as full-time employees take home more income. The IR35 updates address this discrepancy and ensure each party pays the correct amount of taxes.
The rules do not apply to anyone who is self-employed.
The 2017 reporting reform resulted in an additional £550 million in income tax and NICs and deemed a success because of the worker/employee reclassifications and extra tax revenue generated from these updates.
Because of these successful amendments, UK regulators extended public sector employers’ classification responsibilities to private sector employers. This 2020 update reduces noncompliance and generates additional income tax. The reform extends these 2017 provisions to the following private sector employers in the UK:
- Independent contractors
- Recruitment agencies
- Medium- to large-sized companies
However, the 2020 IR35 updates exempt 1.5 million private small businesses. You may be one of these small businesses if you meet the following criteria:
- You must employ less than 50 people
- Annual turnover less than £10.2 million
- Balance sheet must have a maximum total of £5.1 million
How Your Businesses Prepares for IR35 Updates
Use the HMRC tool ‘CEST’ as the first test if you answer the questions completely and correctly HRMC should stand by the output, although CEST does have its own inadequacies. If it gives you an indeterminate answer or one you disagree with seek specialist advice. The worker can disagree, if they do, you have 45 days to respond, there is no further appeal and HMRC will not get involved. You should ensure you have a dispute resolution policy.
- Plan for any immediate costs
- Determining workers’ statuses employed via PSCs or other contracts
- Identifying any IR35 provisions impacting contracts with dates beyond 2020
- Speaking with all contractors about IR35 changes
- Establishing a protocol for any future IR35-relevant working relationships
Enrol off-payroll workers
- Finally, you will need to enrol off-payroll workers onto payroll under a different process. This is because you need to exclude them from employment practices they are not entitled to.
- It’s vital that businesses who employ the services of individuals through intermediaries (PSCs) ensure they have robust systems and processes in place to ensure compliance with the new legislation.
The PSC can pay the worker. This can be done via their payroll without deduction of further tax or they can receive payments in a form of dividends. They get no additional employment rights.
- HMRC has confirmed that they will not normally seek tax from earlier years if the treatment has changed.
How TopSource can support you
TopSource has set up a fast-track payroll service to make this easy, guaranteeing a simple on boarding experience to support compliance in as little as four weeks.
Simply contact us to find out more.
If you’re a TopSource customer, we can provide you with a separate payroll for off-payroll workers. You can email firstname.lastname@example.org or call 0203 6915303.