Top ten tips on preparing for off-payroll worker changes
From 6 April 2020, under the planned changes to off-payroll worker tax rules (IR35), certain organisations who engage contractors will be responsible for determining the tax status of contractors who provide services through their own personal service company (PSC).
This essentially shifts the tax status determination burden from the PSC to the end client organisation (i.e. the business who gets the benefit of the contractor’s services). In addition, where IR35 does apply, the entity who pays the PSC (the fee-payer) is treated as the worker’s employer for income tax and national insurance purposes, and must make the relevant deductions. Sometimes, the end client and fee payer will be the same organisation but, where an agency is involved or there is a more complex supply chain, this won’t necessarily be the case.
Although these changes are still under review (click here for more information), we anticipate that they will go ahead and recommend that businesses prepare for the April 2020 deadline. We have been receiving numerous queries about preparing for IR35 and have set out our top ten tips to assist your preparations:
- Establish whether the IR35 regime applies to your business. This test is twofold: does your business constitute a “medium or large-sized” company for the purposes of the IR35 regime; and, if so, does it engage with contractors who work via PSC arrangements? Click here for more information.
- Put in place a cross-divisional team that has the remit of preparing for IR35 changes. Whether it’s operational, legal, financial, HR or communications, varied expertise will be required to properly assess, prepare for and manage a business’ overall strategy to IR35 changes.
- Carry out a project mapping exercise to establish:
* which departments, divisions or parts of your business are heavily reliant on contractors;
* how much the business currently pays in respect of each contractor, and to who;
* where you sit in the supply chain e.g. are there agency arrangements in place or not; and
* the extent to which each contractor’s skills are integral to your business
- Choose a reliable employment assessment process to determine if your contractors ought to be taxed inside or outside IR35. HMRC has developed guidance and an online tool to check employment status (known as the CEST tool). However, there has been some criticism of the CEST tool, and many businesses are choosing to develop their own assessment questionnaires, considering both the contractual arrangements and an analysis of what actually happens on a day-to-day basis.
- Allocate responsibility for carrying out the employment status assessment to designated individuals within your business, and ensure proper training is provided to those individuals to allow them to carry out the assessment exercise correctly. Be sure you leave sufficient time to carry out the assessments before the new rules come into effect.
- If the result of your assessment is that a contractor is a deemed employee under IR35, consider your next steps. Rather than continue with your current arrangements, it may be better for you to employ the contractor directly, or to engage him/her as a worker via an agency. There are likely to be financial implications and be prepared for possible rate negotiations. Depending upon the arrangements going forward individuals may be afforded employment rights. You should carefully consider the advantages and disadvantages of the different options available.
If you proceed in such a way that IR35 will still affect your business, the following tips will also assist:
- There is a right of appeal in circumstances where either the contractor or the fee payer does not agree with the engaging business’ employment status determination. The engaging business has just 45 days to respond to any appeal, so this ought to be factored into your overall planning process.
- Review your internal systems (e.g. onboarding systems) and ensure that your payroll software and processes are fit for purpose.
- Review your contracts and think about what types of indemnities and protections may be required. You may also need to re-negotiate/reduce contract rates to take account of the tax being paid by the business going forward.
- Finally, consider preparing an IR35 policy, which explains what the regime means for your workforce and clearly sets out how your assessment and appeal procedures will operate in practice – and don’t forget to keep the position/assessment of your contractors under regular review going forward.
For further information on how the changes may affect your business, and how we can assist, please click here.
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