This checklist is aimed at being a practical guide for companies who employ IT contractors and who are looking to evaluate their working practices against the new off-payroll tax rules (known as IR35) that came into force earlier this year.
What is IR35?
IR35 is the name given to HMRC’s approach to verifying the tax status of contractors who work for end-users through intermediaries or personal service companies (PSCs).
HMRC is seeking to ensure that these individuals are appropriately taxed, as employers’ NICs are the single biggest tax cost for many businesses.
The requirement to ensure working practices are compliant with IR35 shifted to the end-user from the 6th of April 2021.
This change has affected many businesses in the private sector who use IT consultants where these consultants operate through intermediaries such as PSCs.
Why are end users now being targeted?
HMRC introduced the changes to the off-payroll tax rules in order to make it easier for themselves to identify whether contractors are paying the appropriate level of tax or not.
Before the 6th of April, HMRC was required to pursue relevant IT contractors and their intermediaries for tax (although these tended to be relatively modest amounts usually).
From the 6th of April, HMRC is now able to pursue large employers who engage multiple relevant contractors to recover the same tax but at a fraction of the administrative and recovery costs.
However, the ultimate target remains the individual contractor, if their tax status does not reflect their employment status accurately.
Practical IR35 checklist
#Status & Status Determination
- Companies should identify all relevant contractors and assess their status
- Contractor status must be assessed fairly. This is often done using HMRC’s Check Employment Status for Tax tool (CEST) but our view is that the wording of the questions leads to a large degree of bias, and fairer tests exist.
- All relevant contractors should have Status Determination Statements (SDS) issued to them
- A status disputes policy should be prepared and then communicated to all of your workforce who are off-payroll
- Any status disputes arising from the issue of SDSs should be dealt with
- A reputable system should be put into place covering regular status reviews, especially when it comes to material changes to working arrangements
- Systems should be implemented to ensure all SDSs are passed down the contractual chain to the relevant contractor
- Identify who is responsible for the deduction of PAYE for each of your relevant contractors if the employed status is determined.
- Ensure your payroll team is briefed and sufficiently resourced to be able to implement IR35 changes effectively
- All customer contracts should be reviewed to ensure sufficient IR35 protections are in place, especially those where relevant contractors are involved in the delivery
- All supplier contracts should be reviewed to ensure sufficient IR35 protections are in place, especially those where relevant contractors are involved in the delivery
- If relevant contractors are moving to an umbrella company you need to ensure sufficient employment law and tax protections exist in your contracts with the umbrella company
- Obtain copies of and then review all contracts with relevant contractors
- Update your precedent agreements to be used for all future off-payroll workers
- Review all of your employment agency/business contracts
#Employment and Pensions
- Consider what the relevant contractor’s status means from an employment law perspective such as whether they are entitled to holiday pay, sick pay and pension contributions
- Agree on a strategy to communicate with all of your relevant contractors
- Ensure you are prepared to amend or issue contracts of employment to reflect status determinations
- Prepare for termination of contractors and re-engagement of individuals on the payroll as appropriate
- Develop and then implement a communications plan to engage with relevant contractors and future off-payroll workers as regards compliance with IR35 from an employment law and tax perspective
- Invest in training for employees and managers on IR35 compliance
- Review record keeping process in line with the possibility of an HMRC audit
- Review all of your insurance policies, including public liability insurance, professional indemnity insurance, and so on
Hopefully, this has given you some background to the IR35 reforms and future articles will explore this further. At first glance, the process seems hugely onerous, but with robust processes and we can remove most of the bureaucracy to easily manageable levels, backed with insurance against HMRC investigations and claims. If you have any other questions please feel free to email me, Jonathon Webley (Managing Director) at firstname.lastname@example.org or ring me directly on 0161 416 6634 or 07941 798 021