IR35 are the tax avoidance rules created to identify contractors (or ‘off-payroll’ workers) who provide services to a client through their own limited company or other intermediary. In the words of the Inland Revenue they, “make sure that workers, who would have been an employee if they were providing their services directly to the client, pay broadly the same tax and National Insurance contributions as employees.”
In place since 2000, important changes to IR35 affecting both contractors and clients were due to come into force last year, but were delayed by the government as part of a package of financial measures in response to the COVID-19 pandemic. However, those changes will now come into effect in April 2021, and because they impact the hiring, status, and taxation of independent contractors, it’s important to prepare for them now to avoid problems later.
What is changing?
Currently, if you use UK contractors through their own limited companies or Personal Service Companies (PSCs), you can classify the individuals as either consultants or employees for taxation purposes. The burden of ensuring the correct classification has always been with the contractor and their PSC.
From April 2021, that burden will move to the client. All large and medium-sized businesses will be responsible for classifying the employment status of contractors with PSCs, and they will be required to follow a new set of administrative procedures to ensure compliance.
Instead of the previous system where companies simply paid contractor invoices, as the “fee payer” - you will become responsible for collecting any payroll taxes and National Insurance contributions incurred if an individual should have been properly classified as an employee.
The UK government estimates that the changes will impact at least 80,000 contractors, meaning there are many employers that will experience a financial impact, particularly global businesses with activity in the UK. Therefore preparation is key, and there are five areas that should be considered by every organisation using contractors:
Work out whether the new IR35 rules apply to your company
If your organisation does not work with any independent contractors, and does not expect to, these changes will not apply. The extended rules will apply only to large or medium-sized businesses, so those with more than 50 worldwide employees, revenue of more than £10.2M, or a balance sheet exceeding £5.1M. Meeting any two of those conditions means the legislation applies and you should keep reading.
Evaluate the status of contracts with PSCs
Companies should compile and assess their arrangements with all contractors that will extend past April 2021. How? The UK government has provided some tools assessing contractor status, but their accuracy has been called into question. As a result, a tax advisor is better placed to help navigate the assessment process.
Determine and communicate your policies
For many organisations, classification changes are inevitable, but it will be up to you to decide what to do to ensure compliance. For instance, will you bring your contractors on as part-time or full-time employees? Will you adjust contracts so that they can no longer be classified as employees? Or will you choose to terminate contractors? Whatever the decision, communicating with your employees who manage relationships with these contractors is an important part of the policy and compliance process
Prepare Status Determination Statements
From April 2021, for every current PSC relationship, you will need to issue a Status Determination Statement (SDS) that notifies the contractor and any other stakeholders of your determination. In some cases, directly hiring the contractor as an employee may make more sense than going through the process of determining status and issuing an SDS. The SDS will include a notification of whether that person should be classified as an employee, along with reasons why. It will serve as notice that they will be classified as such going forward — with any changes to the relationship that would entail.
Settle any disputes
If any contractors disagree with the SDS issued to them, all stakeholders should follow a dispute resolution process, which ideally, should be guided by experts.
Consider renegotiating relationships
Next, you may need to revise some existing arrangements to comply with IR35. Even if you don’t contract with the workers directly, you can still be held liable for non-compliance by ANY link in the employment supply chain. And because the rule changes may mean increased taxes and fees, it may be necessary to renegotiate terms or payment rates, or agree who will pay these costs.
As always, the best advice is to ‘act now’ to understand whether these rule changes are relevant to you and your contractors. If they are, taking proactive steps to meet your obligations and make the necessary changes is the best course of action for everyone involved. And don’t forget, if there’s any uncertainty or difference of opinion between those involved in the review and compliance process, seek professional advice.
Nick Adams, Vice President of EMEA, Globalization Partners
Nick Adams is the Vice President of EMEA at Globalization Partners based in London, UK, where he leads the company’s international expansion into Europe. With a focus on building a strategic partner network and overseeing regional revenue operations, Nick comes to Globalization Partners with a wealth of experience scaling high growth businesses and is a firm believer in customer focus, integrity and teamwork; values that the company enshrines across the organisation in everything that it does.
