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IR35 – Off Payroll Working

The IR35 changes were finally rolled out in the private sector in April 2021 after being around in the public sector since 2017, and has profound changes for some employers and contractors. As IR35 specialists, we can explain this ‘off-payroll tax’ and how it might affect you and your business.

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BRINGING CLARITY TO IR35

IR35 is tax legislation that applies to off-payroll working. It’s intended to close a loophole where contractors effectively work as employees, but avoid paying the appropriate tax by working through a limited company.

IR35 was introduced to the public sector in 2017 and has attracted criticism for its complexity. The latest rules to come into effect have not made it any simpler. Nevertheless, there are penalties and sanctions if an HMRC enquiry decides IR35 applies but has not been complied with. Our tax experts can explain the IR35 off-payroll worker rules and talk you through the necessary actions, whether you are the end-client or a contractor.

WHAT DO THE LATEST IR35 RULES MEAN?

The IR35 ‘off payroll’ public sector reforms were extended to the private sector from April 2021 onwards, following a delay due to COVID-19. These changes have seen the responsibility for determining whether an engagement falls within the IR35 rules move from the worker’s Personal Service Company (PSC) to the end user (including where PSCs are engaged via an agency).

If the engaging organisation deems that IR35 applies, the end user must apply PAYE/NIC on payments made to those PSCs if it pays them directly. Otherwise, the agency would be responsible for applying PAYE/NIC to those payments, based on the end user’s IR35 assessment.

While IR35 rules currently only apply to large and medium sized enterprises that engage contractors through PSCs, we expect to see them being phased in for small enterprises in future years.

END-CLIENT & FEE PAYERS

As an end user or agency that engages with PSCs, there are a number of steps you need to take to ensure compliance with the latest rules:

  • Identify potential impacted workers.
  • Assess those contractors to determine which would be deemed to be employees under the status test.
  • Engage with key stakeholders, including legal, tax finance, operations and HR, and agree responsibilities and ownership areas.
  • Estimate any likely cost increases due to Employers NIC and Apprenticeship Levy changes rising under IR35, and potential changes in contractors’ rates.
  • Consider whether tax fee protection insurance should be purchased to protect you in the event of an HMRC enquiry.
  • Design and implement new systems and processes for dealing with those contractors impacted by the changes.
  • Train the relevant internal team on the changes in systems and processes, and ensure they can effectively determine the IR35 status of engagements.
  • Communicate with contractors to ensure they are aware of the changes and fully aware of the decisions that are being made.
  • Implement a robust process to account for PAYE deductions on invoice payments to inside IR35 contractors.
  • Make ongoing critical assessments of new contractors, to check their awareness of IR35 and your decisions.

CONTRACTORS

Our extensive IR35 knowledge means we’re also well placed to support contractors with these off-payroll working services:

  • HMRC enquiries into your IR35 status for any years prior to 6th April 2021 when it was the PSC’s responsibility to report correctly.
  • Independent IR35 determination reviews to help support your position or any challenge against a status determination you have been issued.
  • Providing contractor or PAYE net pay comparison calculations to help you assess your position and provide the best route for you and your company.
  • Advice on the future position of individual PSCs and assistance with voluntary liquidation where appropriate.

Where the latest IR35 rules mean you move from a contractor relationship to an employee relationship, that leaves your PSC as a potentially unnecessary entity that needs to have its affairs wound up.

This deserves careful consideration, as how the PSC is closed can have significant tax implications for its shareholders. Our experience in dealing with these circumstances means we can ensure the whole closedown is carefully controlled from start to finish, using the most cost-efficient and tax-efficient processes.

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