The IR35 off-payroll working rules increase the compliance burden for growing businesses, likely to hit the technology and media sector significantly, where it is common practice to recruit project-based contractors. Given the uncertainties and challenges posed by the COVID-19 outbreak the deferral is welcome.
What are the off-payroll working rules?
The off-payroll working rules (commonly known as IR35) were designed to stop the avoidance of payroll taxes where a client pays a worker via the worker’s Personal Service Company (PSC) (for example, where ABC Media Ltd pays Blue Ltd, which is owned by Mr Blue, for Mr Blue’s work). Historically, responsibility for IR35 rules has fallen on the PSC and not the client.
With effect from April 2021, new rules will be introduced, so that the responsibility for determining whether IR35 applies will move to the organisation receiving the services (i.e. ABC Media Ltd).
Is your business affected by the new changes?
The change in rules will affect your business if it is a medium or large business. Your entity falls within those categories if any two of the following apply:
- Your annual turnover (excluding donations and voluntary income) is more than £10.2m.
- Your balance sheet total is more than £5.1m.
- Average number of your employees is more than 50.
If your business does not meet this criteria, the responsibility for IR35 remains with the PSC.
What are the new requirements if your business is affected?
If your business meets the new rules you must:
- review each of your contracts to determine whether or not the IR35 rules apply
- prepare a Status Determination Statement (SDS) which explains your business’s determination and the reason for that determination
- give the SDS to your worker and their PSC (or if contracting with an agency, to that agency)
If the outcome of the SDS is that the IR35 rules apply, then your worker will be enrolled on your company’s payroll with tax and NICs deducted, before the net payment is made to the worker’s PSC. Your business is also required to establish a disagreement process for any workers that wish to challenge the SDS they have been sent.
How can you determine whether IR35 applies?
Employment status under IR35 is determined by a wide range of factors such as control, substitution, integration and financial risk. There is often not a clear answer to whether a worker falls within the IR35 rules.
A useful starting point would be to use HMRC’s online Check Employment Status for Tax (CEST) tool, in preparation for the new rules. However, this tool is not definitive and you may need to seek further professional advice if you have queries about specific contracts.
International considerations
Following consultation, the government has proposed to amend the new legislation to exclude wholly overseas organisations with no UK presence from having to consider the new IR35 rules.
Wider PAYE aspects you should consider
There may be instances within a company where an individual is an employer, director or officer, but do not get paid a salary, instead being paid consultancy fees through a PSC. For these cases, payroll taxes and NICs would apply under current rules to these payments as the worker is already an employee.
What action should you take before April 2020?
Tech and media businesses should take action now before the rules come into place. We recommend carrying out the following steps:
- establish a policy and process for reviewing contracts under IR35 rules and issuing the SDS to your workers
- carry out a preliminary review of all existing contracts that are expected to have services performed in April 2020
- ensure that your payroll system is ready to implement the IR35 rules.
Looking for more information?
If you have any concerns about IR35 and your engagements with contractors, or more broadly regarding wider payroll compliance, please get in touch by completing the form below. Our Business Tax and HR consultancy experts can review and help structure your arrangements to ensure that your business is compliant.
The IR35 off-payroll working rules increase the compliance burden for growing businesses, likely to hit the technology and media sector significantly, where it is common practice to recruit project-based contractors. Given the uncertainties and challenges posed by the COVID-19 outbreak the deferral is welcome.
What are the off-payroll working rules?
The off-payroll working rules (commonly known as IR35) were designed to stop the avoidance of payroll taxes where a client pays a worker via the worker’s Personal Service Company (PSC) (for example, where ABC Media Ltd pays Blue Ltd, which is owned by Mr Blue, for Mr Blue’s work). Historically, responsibility for IR35 rules has fallen on the PSC and not the client.
With effect from April 2021, new rules will be introduced, so that the responsibility for determining whether IR35 applies will move to the organisation receiving the services (i.e. ABC Media Ltd).
Is your business affected by the new changes?
The change in rules will affect your business if it is a medium or large business. Your entity falls within those categories if any two of the following apply:
- Your annual turnover (excluding donations and voluntary income) is more than £10.2m.
- Your balance sheet total is more than £5.1m.
- Average number of your employees is more than 50.
If your business does not meet this criteria, the responsibility for IR35 remains with the PSC.
What are the new requirements if your business is affected?
If your business meets the new rules you must:
- review each of your contracts to determine whether or not the IR35 rules apply
- prepare a Status Determination Statement (SDS) which explains your business’s determination and the reason for that determination
- give the SDS to your worker and their PSC (or if contracting with an agency, to that agency)
If the outcome of the SDS is that the IR35 rules apply, then your worker will be enrolled on your company’s payroll with tax and NICs deducted, before the net payment is made to the worker’s PSC. Your business is also required to establish a disagreement process for any workers that wish to challenge the SDS they have been sent.
How can you determine whether IR35 applies?
Employment status under IR35 is determined by a wide range of factors such as control, substitution, integration and financial risk. There is often not a clear answer to whether a worker falls within the IR35 rules.
A useful starting point would be to use HMRC’s online Check Employment Status for Tax (CEST) tool, in preparation for the new rules. However, this tool is not definitive and you may need to seek further professional advice if you have queries about specific contracts.
International considerations
Following consultation, the government has proposed to amend the new legislation to exclude wholly overseas organisations with no UK presence from having to consider the new IR35 rules.
Wider PAYE aspects you should consider
There may be instances within a company where an individual is an employer, director or officer, but do not get paid a salary, instead being paid consultancy fees through a PSC. For these cases, payroll taxes and NICs would apply under current rules to these payments as the worker is already an employee.
What action should you take before April 2020?
Tech and media businesses should take action now before the rules come into place. We recommend carrying out the following steps:
- establish a policy and process for reviewing contracts under IR35 rules and issuing the SDS to your workers
- carry out a preliminary review of all existing contracts that are expected to have services performed in April 2020
- ensure that your payroll system is ready to implement the IR35 rules.
Looking for more information?
If you have any concerns about IR35 and your engagements with contractors, or more broadly regarding wider payroll compliance, please get in touch by completing the form below. Our Business Tax and HR consultancy experts can review and help structure your arrangements to ensure that your business is compliant.
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