Changes to IR35 - Are you ready?

Earlier this month, HMRC announced amendments to the draft off-payroll working (IR35) rules, which are due to apply to private sector engagements from 6 April 2020.

From April, medium and large companies that engage individual contractors through their own limited companies will take on responsibility for assessing the individual's tax status (i.e. whether they are an employee or true contractor for tax purposes), and operating PAYE for some of those individuals.  This represents a significant shift of the cost and risk from the contractor to the end user.

The changes to IR35 are almost universally unpopular with businesses and contractors, but these amendments to the rules have been regarded as providing much-needed clarity.

Under the previous drafting, the new rules would have applied to any payments made on or after April 2020, regardless of when the services were carried out.  However, HMRC has now confirmed that only payments relating to services provided on or after April 2020 will be in scope for the purposes of the reforms to IR35.

Notwithstanding this, it is important that impacted businesses are prepared for the changes. So what does your business 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 be caught, even 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 in which he/she owns at least a 5% share (different criteria apply where the intermediary is a partnership). 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. 

Businesses are legally required to take reasonable care in assessing whether deemed employment applies to a contractor. As a minimum, this will require taking reasonable steps to obtain the correct information to complete the HMRC online status checker correctly.

4. Contracts

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. For any existing contracts, you will need to notify the individual of their status before the first due date for payment under the contract falling on or after 6 April 2020. 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 2020.