IR35: Everything you need to know
The new IR35 rules are being rolled out across the private sector on 6 April 2020. Changes were made to the IR35 for the public sector in 2017, but many businesses are still confused as to what the upcoming changes involve, and how it could affect them. So, if you’re scratching your head wondering what you need to do to prepare, you’re not alone.
The new rules will affect medium and large businesses across the UK including those in the retail and hospitality industries. Businesses that are found to be in breach of IR35 could face serious fines as well as be liable to pay taxes and National Insurance Contributions (NICs).
What exactly is IR35?
Rules around off-payroll working (or IR35) were first introduced by Her Majesty’s Revenue and Customs (HMRC) in April 2000, and is designed to combat tax avoidance by contract workers and the businesses that hire them.
Contract workers who are not on the payroll but seemingly work as regular employees while paying less tax are seen by the HMRC as “disguised employees” and will need to adhere to these new rules.
An important thing to note is that this legislation only applies to medium and large businesses who engage contract workers. Your business qualifies if:
- you employ more than 50 people
- your annual turnover is over £10.2 million
- your balance sheet total is above £5.1 million
- you have contractors in your workforce.
Didn’t tick all these boxes? Great! You can relax and stop reading right here. Otherwise, there are a few things you should know.
How does IR35 affect businesses?
Medium and large businesses will be responsible for setting the tax status of their contractors for all payments made for services provided on or after 6 April. The HMRC will begin evaluations from this date and will impose penalties on businesses and contractors who are found to be in breach of IR35.
If you decide that your contract workers fall under IR35, they will end up paying the same taxes as your regular employees without any of the usual employee benefits such as paid holiday or sick leave.
The work starts now
To minimise your business risks, it is essential that you prepare for the IR35 accordingly as soon as possible. Here are some ways you can tackle the changes:
1. Audit your current contract agreements
The biggest concern with the IR35 reform is the potentially large disruption it could have on businesses. You should review your current employee structure to determine if you have the right talent to move your business forward.
Think about how many contract workers you are currently using. Are there parts of your business that rely heavily on freelance or contract work? How valuable are your freelance or contract workers to your business?
If you hire multiple contractors, it might be tempting to take the easy way out and treat everyone exactly the same way for tax purposes. However, your business could face serious fines if you fail to show that you have taken reasonable care to classify the roles of each contractor under the new legislation.
If you’re not sure which contractors fall within the new IR35 regulations, you can use the Check Employment Status for Tax calculator on the government’s website.
2. Communicate clearly
It is very important that you actively and clearly communicate any changes to your contract workers to avoid confusion, disgruntlement, and losing valuable talent. This will help prevent unnecessary disruptions to both their services and your business.
Ensure the working relationships are clearly defined, and that you have an IR35-compliant contract with each of them.
3. Expect increased rates
If your contract workers fall under the new IR35 rules, they may find it necessary to increase their rates to compensate for the added tax they will be facing.
Once you have determined which (if any) of your freelance or contract workers will be affected, you should establish a mutual rate agreement with them to avoid being caught off guard with increased rates later.
4. Ensure your systems are compliant
Major tax reforms are the ideal opportunity to review and improve your current systems. Come 6 April, it will be more important than ever that you have systems in place to help your business remain compliant.
Now is the perfect time to think about investing in a complete end-to-end software solution that will give you peace of mind at tax time.
Roubler helps you easily manage your contract workers, giving you visibility over the number of hours each contractor works, and enabling better business reporting. This will give you peace of mind if you do happen to be audited for IR35.
What’s more, if you do need to transition your contract workers over to full-time employment, Roubler can help you make the switch seamlessly in one easy step.
Roubler also includes the ability to build in pay rules to ensure your business is always compliant with the latest changes to legislation in the long term.