IR35: What it means for business and payroll
Postponed for a year and unmentioned in last week’s budget, this Easter weekend won’t just see COVID-impacted egg hunts but will also see lots of employers finalising their IR35 positions.
A quick recap on IR35
IR35 is a method for HMRC to ensure that intermediaries providing services to other businesses are paying a similar amount of tax and National Insurance contributions that they would if they were an employee of that company.
In effect, it will stop employees hiring contractors to avoid hiring workers and their associated benefits. It will almost certainly mean a significant contraction of the single director companies providing services to third parties.
What are the changes?
IR35 already applies in the public sector but, from 6 April, medium and large businesses will have to determine whether their service provider is a deemed employee or not. Where they are, the “deemed employer” will need to deduct and pay to HMRC PAYE and NI before paying their “deemed employee” the balance of their fee.
Only small businesses will be exempt from having to make this determination. This doesn’t mean that small businesses will be exempt from the above, it’s just that for them the service provider will determine whether they are “inside IR35” or “outside”.
A small company has to satisfy at least 2 of the following 3 tests:
- annual turnover of no more than £10.2m
- balance sheet total of no more than £5.1m
- no more than 50 employees
More information on the changes can be found here.
Why do it?
Although officially HMRC are selling this as “saving administration burden” for personal service companies, I think we can honestly say that HMRC is pushing ahead with this because it is costing them north of £1.5bn in lost annual tax revenues.
How will this affect businesses?
The key thing for businesses hiring new contractors (or renewing contracts) will be to determine whether an individual is “inside IR35” or “outside of it”.
HMRC has provided a helpful tool called Check Employment Status for Tax (CEST) to determine the result. HMRC have committed to honouring the result of (assuming that you complete it accurately and don’t try and “force” a result from it). The CEST tool is helpful, however there will be a frustrating number of “no results” generated, which will cause confusion and consternation.
These “no results” highlight the complexity of the decision, the lack of clarity and a cynical person might suggest that employers in this scenario may feel that they need to seek the safer decision of being “inside IR35” which is undoubtedly to the advantage of the Treasury.
What does it mean for payroll?
Anyone determined to be a “deemed employee” will have their tax and National Insurance deducted by the “deemed employer” and paid directly to HMRC before paying the residual fees to the “deemed employee” or their company.
These payments will also need to be reported to HMRC in the FPS and therefore your payroll software needs to be IR35 ready (spoiler alert: KeyPay is IR35 ready).
Aside from the broad requirements on payroll, there are a number of their key points to be aware of:
- The rules apply on a contract basis so a check needs to be made for any new contract, you may have some contracts with the same worker that fall within the rules and some that don't.
- If the IR35 rules apply the contractor will be classed as a deemed employee, any part of an invoice that relates to work is subject to tax and class 1 NI contributions.
- The deemed employer is not obliged to offer membership of a pension scheme, this includes auto enrolment.
- Deemed employees are not entitled to any holiday, sickness or parental payments and student/post grad loan deductions should not be made.
- The employer's NI is not included in the calculations for employment allowance.
- Apprenticeship levy calculations should be applied for deemed employees.
- When a deemed employee finishes they should receive a P45.
- Deemed employees can also be given a P60.
- The date the payment is actually made determines the tax period.
Finally, from the “deemed employee’s” perspective, anything they pay themselves in relation to these fees should either be paid as a salary without any further NI or PAYE taken or dividends that do not need to be recorded on their self assessment. An added complication to avoid double taxation.
The key take home from IR35 is that if your business - or your client’s business - is likely to be affected then you should be preparing for it now, especially as the “deemed employee” might dispute your categorisation of them.
IR35 determinations are not always going to be straightforward and so will take time - at a time which is already busy in terms of payroll and accounting.
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