All unincorporated businesses, including sole traders, the self-employed and trading partnerships, will be taxed on…
Large and medium-sized businesses now just have a couple of months left to prepare for the changes to the off-payroll working rules (IR35).
From 6 April 2021, in most cases, the engager (employer) will be responsible for deciding whether to deduct tax and National Insurance Contribution (NICs) from freelancers and contractors, operating via a Personal Service Company (PSC), as if they were employees.
The new IR35 rules do not affect small businesses, as defined by the Companies Act 2006, where they meet two or more of these criteria:
- Annual turnover is no more than £10.2 million;
- A total of fixed and current assets (before deducting current liabilities, long-term liabilities and deferred tax provisions) over £5.1 million; or
- No more than 50 employees.
When a business grows from a small to a medium or large-sized business there is a two-year transition period before the IR35 regulations fully apply to that business.
Engagers are required to undertake this IR35 determination for every contract they agree with a worker. The official guidelines are as follows:
- Pass your determination and the reasons for the determination to the worker and the person or organisation you contract with
- Make sure you keep detailed records of your employment status determinations, including the reasons for the determination and fees paid
- Have processes in place to deal with any disagreements that arise from your determination.
The Government has created an assessment tool, CEST, which can be found here. This can be used to assess whether the engagement is classed as employment or self-employment and a report can be printed out as a record of your assessment if challenged by HMRC.
If the determination results in a contractor being within the IR35 rules, you will need to deduct and pay tax and National Insurance contributions to HM Revenue & Customs via PAYE.
Where an employer fails to correctly identify a disguised employment scheme, the worker’s tax and National Insurance Contributions (NICs) become their responsibility.
Where you hire a contractor via an agency it is the responsibility of the closest intermediary to the PSC to calculate, deduct and pay tax and NICs via PAYE on the contractor’s remuneration.
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 businesses must be 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.
If the engager fails to correctly determine status, they will be held liable for any tax charges or NICs and could face a penalty from HMRC.
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.
There is a disagreement procedure created by the Government to be used by the contractor and the organisation paying the fees if all parties do not agree with the determination.
Create an agreement policy
Businesses should prepare an agreement policy for any new contractors they take on from April 2021, which clearly outlines the contractor’s employment status.
Existing contractors might also need their agreements 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 income tax and NICs being deducted by employers.
You should discuss this with contractors as soon as possible so you can factor any additional costs into your employment budget.
If you rely on the services of contractors or freelancers it is important that you prepare your payroll systems and process for these changes.