The IR35 tax reforms have been put on ice for a year due to the escalating COVID-19 crisis – giving hard-hit businesses breathing space to comply.
The new rules, which completely alter the way contractors are taxed, had already led to firms scrambling to fully understand and adapt, long before the pandemic began.
But the Government has postponed the start date until April 2021.
Steve Barclay, the chief secretary to the Treasury, said the postponement was part of a greater effort to reduce the impact of COVID-19, aiming to reduce the strain on businesses. He emphasised, however, that IR35 was postponed, not cancelled.
So, businesses have longer to prepare for IR35, but they will still need to focus on planning for the changes.
Below, we’ve listed some of the essentials that firms need to know to make sure they’re ready for April 2021.
What is the purpose of IR35?
In a nutshell, IR35 will require employers who use staff from a Personal Service Company (PSC) to verify if that worker is functioning as an employee or supplier.
HMRC classifies the purpose of IR35 as “ensuring that workers, who would have been an employee if they were providing their services directly to the client, pay roughly the same tax and National Insurance contribution as full-time employees”.
Who will IR35 impact?
IR35 will impact medium and large private sector businesses who meet two or more of the following criteria:
• Have more than 50 employees
• An annual turnover greater than £10.2 million
• A balance sheet total greater than £5.1 million
How will IR35 be enforced?
HMRC will deploy inspectors to conduct a ‘test of employment’, which assesses the nature of the working relationship, rather than the actual written contract.
Also, HMRC recently stated (before the COVID-19 outbreak in the UK) that businesses wouldn’t face penalties for any errors relating to IR35 in the first year unless it finds intentional non-compliance.
What can you do to prepare?
If IR35 applies to your business, you need to put the necessary procedures in place to determine the status of every contract, informing workers on their updated status within 31 days once the legislation is live.
Once the status of each contractor has been confirmed, you need to also notify the PSC within 31 days.Contractors who are now classified as employees need to be run through your payroll to process their tax and National Insurance contributions.
For more information on upcoming legislative changes and everything to do with accountancy and payroll, check out our official IRIS blog here. You can call us on 0344 815 5656.