Part 1. Changes to IR 35 Law
The changes in the IR 35 regulation were going to come into force on 6 April 2020, but due to the coronavirus pandemic, IR35 was postponed. Now, the IR35 delayed 2021 will be seen to come into effect on 6 April 2021. So, the time has come for employers to reconsider IR35 preparation on their schedule and ensure that they are prepared for the implementation on 6 April 2021.
The IR35 bill ensures that workers that provide services via an intermediary like a personal service company but working like employees, have to pay the employment taxes just like the other employees do. Transformify helps address diversity hiring needs. It also runs PR, communication, and marketing campaigns with partners and NGOs to increase awareness of CSR programs and diversity recruitment initiatives.
The new IR35 reform or off-payroll working rules to the private sector have significant inferences for end-user businesses. This includes:
- An extra administrative burden on businesses that involve individual contractors through PSCs
- High business costs as employer’s national income contributions for individual workers that are resolute to be employees for tax objectives; and
- Higher rates of pay required by workers to lessen the high tax burden that they face.
Following are the key changes in IR 35:
- Large or medium-sized end-user businesses that are caught by the new IR35 rules need to have a “UK Connection” for one tax year
- End-user businesses have to be responsible to respond to requests to confirm whether or not they be eligible as “small” for the tax objectives and
- Qualifying conditions in relation to company intermediaries are broadened.
If you are classified as a small business, then the responsibility to determine the IR35 status of a worker stays with the PSC. There is no need to get anxious about the future amendments in IR 35 regulation.
Part 2. Steps needed to prepare for IR35 reform
Remember to listen to the taxman if you work for any recruitment agency or a medium-sized or large client, then there are high chances for you to get impacted by the IR35 changes. Failing to adhere to the new off-payroll working regulation can result in the following:
- Backdated demands for tax, NICs, and PAYE,
- Fines for late submissions and delays
- Damage to the reputation that could hinder your capability to attract contractors, and freelancers
Here are the steps needed to prepare for IR35 reforms that are going to enact in April 2021.
- Conduct a complete review of the contractors and staff and determine the status of employment of workers
- Decide the status of employment of a worker for every contract on which you agree with the worker or an agency
- Explain the reason behind the determination.
- Keep detailed records of the determination along with the reasons behind it and fees that you have paid. It will make it easier to deal with HMRC and prevent any disagreements from arising.
- Review employment contracts. Check about the independence of the worker with respect to the business. The more control that the company has over a freelancer/ contractor there are more possibilities that HMRC will deem them an employee.
- Communicate with contractors throughout the process. Tell them how much you care to evaluate their status. It will help minimize the risk related to any disagreements or confusion.
- Be prepared to notice that workers will request to increase their daily or hourly rate to compensate for NICs and tax being deducted by employers
- When implementing new recruitment procedures, ensure whether or not the job role is for a contracted period for a self-employed individual or a permanent internal role.
- Set up a payroll system
- Have proper processes in place for dealing with disagreements
Part 3. What it means to be ‘inside IR35’?
IR35 was introduced by the government to take hold of disguised employees that use a limited company for reduction of their tax liability. This is because such workers should ideally be paying tax through PAYE.
To be categorized as “inside IR35”, a worker should be working as a contracted or permanent employee. This will change the way he will be taxed. A worker that works as a regular PAYE employee comes under IR 35 regulation.
If IR 35 catches workers that fulfil the criteria of the regulation, then they will be entitled to pay National Insurance Contributions as well as income tax as if they were employed by the company. This can lead to a significant financial impact on the company.
Below are the criteria that HMRC uses for the determination of whether or not you work inside IR35, or not.
- The extent of supervision of the work
- How much control that the employer has over its workers and how much freedom that workers have in the company,
- Whether the worker could send any substitute to complete the job in his absence
- Whether a worker can accept several different jobs other than the existing jobs
- Does the client have any obligation to provide consistent work to the worker?
Part 4. When IR35 reform takes effect?
IR35 legislation, called off-payroll working, was initially introduced in April 2000 to combat the use of limited companies and personal service companies that are set up by workers to prevent being viewed as an employee for tax-related purposes. This enabled contractors to pay lesser tax compared to what they would have done in the form of an employee.
As per IR35 delay HMRC, the changes in IR 35 will come into effect from April 2021. The responsibility to determine the worker’s employment status will transfer from the limited company of the contractor to the end-user of the freelancer or contractor services. This modification was made in 2017 for only public sector organizations.
It will now be applicable for all large-sized and medium-sized businesses that operate within the private sector. Workers have to be classified as self-employed or employed for tax purposes.
If any worker is deemed to be employed, are called ‘inside IR35′, as the client. It is important to operate PAYE, deduct employees’ NICs and tax from their fees, and pay for employers’ national insurance contribution on their fees.
Having been categorized as a small business, the responsibility to determine the IR35 status of the contractor stays with the PSC. There is no need to worry about future changes.