In April 2021, new changes took effect regarding the IR35 law, also known as the ‘off-payroll’ or ‘intermediaries’ legislation. Under these changes, private businesses of certain sizes will have the responsibility to decide whether any workers who currently provide services through intermediaries are now ‘deemed employees’ for tax purposes. In case they are, employment taxes then need to be paid on top of the fees engager businesses pay to the intermediaries, which could have significant financial and legal implications for many businesses. If your organisation is using contingent workers or even thinking of hiring a contingent workforce in the future, consider these important aspects of IR35 first:
Important changes to the law
In an effort to remedy the fact that too many people considered themselves to be outside IR35 when they were in fact within it, new changes to the law were introduced. Now, the ‘deemed employee’ status applies and payments are made by large private businesses or mediums to intermediaries when supplying the worker’s services. These payments are subject to payroll tax deductions.
Before you consider responding to these changes, it’s worth confirming whether your organisation is affected by the new rules. These changes won’t apply if you run a ‘small’ business, meaning you meet at least two of these criteria: the number of your employees is not higher than 50, your balance sheet total is not larger than £5.1m, and your annual turnover is not larger than £10.2m.
Defining a ‘deemed employee’
Defining employment status in order to comply with the new IR35 rules might prove to be challenging. Common indicators still remain relevant, but careful consideration is advised when determining relationships. These factors, among others, are considered to be indicative of employment status: there is no substitution clause, the business decides when, where, and which work is done, the worker is paid a set yearly or monthly amount, the business offers benefits, the worker does not need to provide their own equipment, the worker interacts with customers, etc.
HMRC has also provided the Check Employment Status for Tax or CEST tool for identifying a ‘deemed employee’. CEST includes the mentioned criteria, but it has been widely criticized for being too superficial and inconclusive as well.
Implementing the changes
As these new rules became law, additional statements now have to be provided, and those who are defined as ‘deemed employees’ will have to go onto the payroll. As already mentioned, this could be quite a difficult task for organisations to complete on their own.
In this instance, hiring a professional consultant for IR35 compliance might be the best course of action. Such experts will ensure you have the right processes and documentation in place to hire workers compliantly, thus minimising the risk of potential financial penalties. A good consultant will also be able to offer a more sophisticated online platform that will efficiently assist you with the complex classification issues related to engaging contingent workers.
The Status Determination Statement
Issuing a Status Determination Statement (SDS) for every individual working through an intermediary is also among your new responsibilities. This should not only include individuals defined as ‘deemed employees’ under the new IR35 rules, but also those you consider to be self-employed for tax purposes.
The SDS has to include the specific reasons for the decision you’ve made regarding the employment status, and ‘reasonable care’ has to be used when preparing it. HMRC has advised organisations not to make blanket determinations, such as deciding to define every worker as a ’deemed employee’ for ease.
Communicating with the workforce
Once you have recognised workers supplying services through persons with significant control subject to changed employment status, consider communicating with them regarding the new IR35 changes and effects. It might be best to renegotiate the terms of your arrangements in an effort to prevent an employment status determination challenge.
It could also be beneficial to provide an employment contract. Under any circumstances, factoring in the added expenses to the business of the Employer National Insurance Contributions is advised. Certain consultancy contracts may even be left to expire, if the conditions are suitable.
The IR35 system should be considered before making any staffing decisions in the future. For existing contractors, you should respect their status under the employment law and possibly consult an employment adviser before beginning discussions. When it comes to new hires, however, it might be wise to agree in advance on what their employment status will be, as well as the resulting tax implications.
