The changes to IR35 due to come into force on 6 April 2021 are almost universally unpopular with businesses and contractors. Predictions that the measures will raise an extra £1 billion in tax have hardly soothed businesses' nerves as they struggle with the ongoing costs of the pandemic. During the general election campaign, the Chancellor indicated that the roll-out to the private sector would be reviewed, raising hopes of a postponement.
So with a few months to go, what do businesses need to do to prepare?
1. Check whether the rules apply to you
The new rules will apply to medium and large companies (with similar criteria for non-corporate entities).
Any company which does not satisfy two or more of the following criteria in a particular tax year will be within the scope of the new rules:
- annual turnover is not more than £10.2 million;
- balance sheet total is not more than £5.1 million; and
- not more than 50 employees.
Group companies which satisfy these criteria will nevertheless be caught if their parent company does not satisfy two or more. Companies in their first financial year will, however, not be caught. All businesses should assess whether they are within scope and ensure this is assessed each tax year.
2. Audit your contractors
If you've not already worked out which of your contractors are potentially covered, you need to do this urgently. Identify which of your individual contractors provide services personally via a personal services company or similar intermediary from which they are entitled to receive payment for the services they are providing to you. Agency workers who are paid by their agency via PAYE aren't within the scope of the rules.
3. Assess which contractors will need to be paid through PAYE
You will need to assess whether the individual would be deemed to be an employee if they had entered into a contract with you directly, rather than via their personal service company. This entails reviewing their contract and working arrangements.
Businesses are legally required to take reasonable care in assessing whether deemed employment applies to a contractor. This includes completing the HMRC online status checker accurately and, in most cases, making an individual assessment, not taking a blanket approach to assessing status for your contractors.
The likelihood is that your existing self-employed contracts won't permit PAYE deductions, so you will need to terminate existing contracts with contractors who are in scope and enter into new contracts. You will need to consider what additional terms you need in your contracts – e.g. requirements to provide accurate information to enable tax status to be determined and payroll to be processed.
5. Get your paperwork and processes in order
The new rules are quite process driven. To make the bureaucracy work smoothly, you will need internal processes and template documents in place to deal with the following:
- Assessing the status of new and existing contractors
- Notifying contractors (and the agency which pays the intermediary, if applicable) of their deemed employment status and, if requested, providing the reasons for the determination within 31 days of a request.
- Giving the contractor an opportunity to challenge the determination and responding to a challenge within 45 days
- Setting up contractors on the company's payroll system
6. Communication plan
Communicating with contractors about these changes at an early stage is essential. Many will be dismayed at the prospect of paying more tax and national insurance, and may seek to negotiate their fees upwards to account for this. The decision about whether to increase fees or require them to absorb the extra costs will depend on the commercial imperatives; bluntly, how important is it to retain them? If you are dealing with several affected contractors, you may need to communicate with them as a group to minimise gossip and uncertainty.
7. Timing is everything
Many contractors' contracts are terminable on 30 days' notice or similar, so factor this into your planning if you will need to terminate existing contracts. It may be useful to prepare a project timeline with clear deadlines for migrating existing contractors over to new contracts in advance of 6 April 2021.