IR35 Rule Changes

Next week, new IR35 tax changes will come into force in the private sector, meaning some self-employed workers and the businesses that employ them will have to pay tax differently. Changes were introduced in the public sector in 2017 and were due to come into force in the private sector in April 2020, but were pushed back 12 months due to the impact of the coronavirus pandemic.

As the delayed rules come into force, our head of employment, Daniel Wilde revisits the changes and what they might mean for you.

What is IR35?

IR35 refers to the off-payroll working rules being put in place to ensure that contractors working for companies and those companies themselves are paying the correct level of tax and national insurance.

These changes will mirror rules that apply in the public sector and place the onus on businesses to ensure HMRC compliance, whereas previously the onus was on the individual supplying his/her services through their company.

Why are the changes being introduced?

HMRC believes that thousands of people employed via an intermediary or via a Personal Services Company (PSC) have been paying incorrect tax, meaning the Treasury is missing out on income tax and national insurance contributions from both the workers and the company employing them.

These changes will fundamentally change the operation of IR35 by making the end client responsible for assessing a consultants employment status and applying the correct PAYE withholding.

What will change from April 2021?

From 6 April, all medium and large-sized businesses in the private sector will be responsible for deciding whether IR35 rules apply. The correct categorisation of each individual’s employment status will be critical because it impacts on their employment rights and the correct taxation of payments made to them.

Organisations can face potentially significant penalties by incorrectly treating individuals as self-employed rather than employees or workers and/or by misapplying the rules relating to IR35 once the changes are implemented.

How can you prepare for IR35?

In order to prepare for the new rules coming into force on 6^th April, the end-user must take reasonable care in making an assessment and confirm its assessment together with reasons in a Status Determination Statement (SDS)

To prepare for this you should;

Contact your current consultant/freelance/self-employed workforce
Review your contractual documentation, identify potential risk areas and put in place a plan to mitigate these risks
Consider terminating existing arrangements and look at what can be done to minimise legal and commercial risk
Update your monitoring processes, contractual documentation and risk assessments to ensure compliance
Recognise exemptions from IR35 rules
Compile your Status Determination Statement (SDS) and provide copies to your consultants/freelance/self-employed workforce.

For help with preparing your status determination assessments, our employment law team can assist both contractors and businesses. Please contact Daniel Wilde on wilded@hevans.com or 01633 244233.