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Businesses now just have a matter of months left to prepare for the changes to the off-payroll working rules, also known as IR35.
The introduction of the IR35 legislation to the private sector in April 2021, following its delay earlier this year, will mean that the engager (employer) will be responsible for deciding whether to deduct tax and National Insurance Contribution (NICs) from freelancers and contractors as if they were employees.
The new rules do not affect small businesses, as defined by the Companies Act 2006 (i.e. they meet two or more of these criteria: annual turnover is no more than £10.2 million; balance sheet total is no more than £5.1 million; or no more than 50 employees), but it is important that non-exempt businesses prepare now.
It is estimated that almost a quarter of the UK’s workforce now works on a contingent basis, either in the public or private sector, and so it is important that businesses are prepared for the changes ahead.
Here are some basic steps that all businesses can take to help them prepare:
Conduct an audit of freelancers and contractors
As it will be the responsibility of the person engaging the services of a contractor to determine whether their work falls inside the new rules, you should carry out an audit of all employees and contractors currently working within your business to determine who may be affected.
Determine who falls under the rules
Last year, many businesses were considering a blanket approach to freelancers, but recent research suggests that more companies are taking a measured approach to ensure they aren’t disadvantaging contractors. You will need to determine whether each contractor falls “inside” or “outside” of the new rules. This should be done on a case-by-case basis, as you could face serious repercussions for failing to demonstrate reasonable care to correctly classify such roles for employment tax purposes.
Communicate all changes
Once you have determined whether a person falls within the rules or not you should communicate any changes to them. It is important to demonstrate that you are taking reasonable care to assess their status.
If you determine that a person should be within the new rules and you switch them to the PAYE system, as required, they could see their take-home pay reduced considerably. You should take the time to discuss these changes with them.
Create an agreement policy
Businesses should prepare an agreement policy for any new contractors they take on from April, which clearly outlines the contractor’s employment status. Existing contractors might also need their agreements to be adjusted in light of the IR35 changes if they run into the new financial year.
Consider the costs
Many contractors have indicated that they intend to increase their daily or hourly rate to compensate for their tax and national insurance being deducted by employers. It is important that you discuss this with contractors as soon as possible so you can factor any additional costs into your employment budget.
Remember, where contractors operate through an agency, then it is the agency’s responsibility to deduct tax and pass the information on to HMRC. In this case, contractors would be on the agency payroll and not your own.
If you rely on the services of contractors or freelancers it is important that you prepare your payroll systems and process for these changes. If you would like support with the transition to IR35 next year, please contact us.