The changes to IR35 and off-payroll working

29th Mar 2021
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Engaging contractors on a long-term basis is an established working practise for many businesses. Freelancers and contractors may work exclusively for one company, but without actually appearing on the company payroll – instead, they will invoice the company for the work carried out and their fees will be paid through the company’s accounts payable function. 

However, changes to the off-payroll working rules (referred to as the IR35 rules) mean that some contractors will end up having to become employees and ‘off-payroll workers’.

We’ve looked at the main changes to the IR35 rules and how these will affect self-employed contractors and the businesses employing them.

What are the main changes to the IR35 rules?

When a contractor is working for a medium or large private sector company, this company (the contractor’s client) will now determine the contractor’s IR35 status. 

The company must take care when making this assessment, of course, but it’s likely to have a negative impact for any contractors who become classed as ‘within IR35’. Once you’re hit by the IR35 rules, this will mean taking the contractor from being a self-employed contractor to being an ‘off-payroll worker’ in your payroll system, with all the subsequent requirements for tax and National Insurance Contributions (NIC) deductions to be made. 

If the business that a contractor is working for is a small private company, the contractor can still continue to make their own assessment of their employment status. But from 6 April 2021, medium or large private sector companies will need to determine whether a contractor is ‘employed’ or ‘self-employed’ for tax purposes.

This is an important change for contractors, for a number of key reasons:

  • The rules that govern the contractor’s employment status haven’t changed. But what has changed is the likelihood of them being classed as employed (and within IR35). 
  • When a contractor is left to make this decision (when working with a small company), it’s far more likely that they will choose to be classed as ‘self-employed’, with all the tax benefits that go with this.
  • When a medium to large company makes this decision, the chances are far higher of the contractor being defined as ‘employed’ – leading to an impact on their tax and their National Insurance Contributions (NIC) and the net amount they are then paid.

When does a business become classed as a medium/large company?

To know whether your company, or your payroll clients, will be affected by these changes, you need to understand whether a business is classified as a medium/large company. This has been defined in the IR35 legislation.

A medium/large company meets two or more of these conditions:

Turnover > £10.2 million

More than 50 employees

Balance sheet total > £5.1 million

If your company, or your payroll client, meets two or more of these conditions, you’ll need to contact all of your self-employed contractors to make them aware of the changes. Then you will need to make the judgement around whether these contractors are outside IR35 (self-employed) or whether they are within IR35 (employed).

If your client (or clients) meet these conditions, you’ll need to liaise with the client’s company to find out how they plan to classify your employment status.

What are the main steps for dealing with off-payroll working?

If you’re employing a large number of self-employed contractors, this new change to their working and tax status is likely to create a significant amount of extra work when it comes to meeting your compliance requirements, preparing the payroll and paying these workers.

These are the key steps you’ll need to factor in from the start of the 2021/22 tax year:

If the company meets the definition of being a medium/large company, you must assume responsibility for making the IR35 determination. You can use HMRC’s CEST tool to assist you with the assessment. You’ll also need to notify your contractors of these changes by issuing a Status Determination Statement.

Under the off-payroll rules, once a contractor has been deemed to be ‘within IR35’ they are now an employee of the business and will need to be paid as an ‘off-payroll worker’. As such, either the company or the recruitment agency supplying the contractor will become responsible for deducting income tax and NIC. This means acquiring a tax code for the contractor, calculating the PAYE and NIC on the fees paid, and deducting these from the fees charged before making payment.

Making it easy to cope with off-payroll workers

If you’re worried about the extra administration time involved in dealing with off-payroll workers, there’s good news. BrightPay has full functionality to deal with off-payroll workers and will make the whole process straightforward and hassle-free.

If a contractor has been deemed as ‘within IR35’, you can simply tick ‘off-payroll worker’ within the ‘Tax, NICs, RTI’ tab. You’re then set up to manage the tax and NIC deductions in the correct way, without any of the usual employee considerations, such as auto enrolment, being available.

If you’ve not considered the employment status of your contractors, now’s the time to get started. With less than a month until the new tax year, it’s important to be prepared and ready.

Find out more about paying ‘off-payroll workers with BrightPay.

Free IR35 Webinar

Learn more about IR35 and how you can prepare. In our upcoming webinar, co-hosted with industry expert Jas Jhooty, Director at emTax, we will be discussing what contractors and employers can do to maximise the number of ‘outside IR35’ SDS rulings to reduce business costs. Plus, learn how to process ‘inside IR35’ contractors in payroll. 

To register for this free webinar, click here.