This year brings the introduction of the IR35 reform in the private sector. If your business is engaged with contract workers, you can expect to see some changes around how you hire – but, the reform is manageable. If you’re worried about the impact of this reform, keep reading as we have some insight that will prepare you.
IR35 changes after April 6th 2021
- Similar to the IR35 changes that occurred in 2017 in the public sector, the private sector will see contractors working for medium-large businesses lose the right to determine their own IR35 status. This responsibility will lie with the end client/ fee payer.
- Contractors providing services to small businesses in the private sector will continue to determine their own IR35 status.
This means that many businesses will soon have to determine whether a worker should be self-employed or employed for tax purposes – something they’ve never had to consider before.
Implications of IR35 reform
- Financially speaking, some contractors operating inside the clutches of IR35 can expect to take home up to 25% less after-tax, and businesses engaging them on the payroll will incur similar costs.
- As well as becoming liable for making IR35 decisions, liability for making incorrect decisions will also transfer from the contractor to whoever pays the fee, this may be either the end client or the recruitment agency involved.
How to manage the IR35 reform
Whilst a blanket ban on contractors may be tempting to avoid the above two implications, we believe that businesses can continue to reap the benefits of the skills and flexibility of contractors, by approaching the reform pragmatically. Here are five steps businesses should take now:
- Assess IR35 status with ‘reasonable care’
We recommend using a third-party specialist to assess the status of contractors. This must be completed by 6th April.
- Issue Status Determination Statements (SDS)
Once IR35 status is assessed end clients must inform their contractors, and the recruitment agency involved, of the result via an SDS which outlines their deemed status and reasons for this decision.
- Set up compliant payroll processes
Contractors deemed inside IR35 will be taxed PAYE. This needs to be subtracted from their invoice/ timesheet and sent to HMRC by 6th April to avoid non-compliance.
- Make sure there is a clear audit trail
In case of an investigation, it would be wise for businesses to ensure they maintain a transparent audit trail to show that everything has been done by the book and compliantly.
- Pursue ways of managing IR35 risk
To protect outside IR35 determinations, (contractors deemed self-employed), businesses can equip themselves with IR35 insurance which will cover the cost of expert advice, legal fees and any resulting fines or tax liabilities owed to HMRC.
Businesses that follow these steps and approach the IR35 reform sensibly will find themselves in a strong position to navigate any challenges they may incur in 2021, whilst also remaining competitive at hiring the best flexible talent.
If you’d like to discuss any of this information further, you can contact us on +44 (0)1483 233 000. Alternatively, visit our contact page and get in touch.