Navigating New IR35 Rules

In the UK, currently, one of the most controversial topics in payroll is the IR35 contract. As of this month (April 2021), private sector employees now have to the follow the same rules as the public sector regarding the IR35. Agencies like the Federation of Small Business have warned both companies and contractors will see changes from this. In fact, many experts have gone as far to say they worry freelancing will cease to exist, while other industry professionals say that is an exaggeration.

What is the IR35?
If you are not practicing payroll in the UK, you may have never run across the IR35. Simply put, the IR35 is a form that helps prevent workers from avoiding tax by “claiming to be contractors.” Under the IR35, 95% of all income through a contract is deemed as a taxable salary.

What do the changes mean?
Beginning this month, private sector employers must be held responsible for determining whether IR35 applies to any contractor they hire. Basically, this requires them to treat the contractor as an employee for tax purposes. This is nothing new to the public sector, which has required this since April 2017.

Because of the changes, private sector companies must now decide whether to treat contractors as contractors and risk a hefty fine…or treat them as employees with different costs and responsibilities.

There is widespread concern that genuine contractors will now be classified as employees, which could lead to an unfair hit to both employers and contractors, with contractors maybe losing their jobs.

Tips for Employers
It is recommended that medium to large private sector organizations begin assessing each contractor role that’s currently in place. Payroll professionals need to determine if off-payroll working rules apply. And if so, the new status determination must be communicated with each worker directly, as well as to any third-party client contracts, for example, an agency.

Potential Problems
You may be tempted to create a blanket rule for your off-payroll workers, but this has already backfired for several companies, including banks that made the decision to classify every off-payroll worker inside an IR35. This creates significant tax increases, which gives contractors the hard decision of facing pay cuts or leaving their roles.

How organization handles this can have a strong impact on retention.
Workers who suddenly fall under IR35 will face a higher tax rate. Additionally, this could make it harder for employers to find talent to fill roles that were traditionally lower paying.

Potential Exemptions
Small businesses can opt out of the IR35, as a method to reduce administrative burdens.

To be classified as a small business, an organization must have:

  • Annual turnover of £10.2 million or less
  • Balance sheet total of £5.1 million or less
  • No more than 50 employees

According to the UK government, all private sector companies should take reasonable care when making a decision about how to proceed, regarding the IR35 forms. UK government officials offer the following advice:

  • Take Reasonable Care in Determinations: Failure to make a good decision will result in the worker’s Income Tax and National Insurance contributions becoming the employer’s responsibility.

Overseas Clients
If your company is based completely overseas, the off-payroll rules do not apply and if the rules do apply, the worker’s intermediary company will be responsible.

In order to have a UK connection you must either 1) be a resident of the UK or 2) have a permanent establishment in the UK.

What if a Worker Disagrees with your Determination?
A contract worker or a deemed employer may disagree with your decision about employment status.

If this happens, according to the UK government, you will need to:

  • Consider the reasons the party disagrees. The worker or their agency should give you details.
  • Decide whether to maintain the determination if you still feel it is correct and give all parties reasons why.
  • If you decide the determination is wrong, you will need to provide a new termination.
  • Keep a record of all your determinations and the reasons for them.
  • Keep a record of all representations made to you.
  • Confirm which date your determination will begin being valid.

Final Procedures
Employers must also provide a response within 45 days of receiving notification that the worker or deemed employer disagrees with their employment status. During this time, all employers should continue to apply the rules in line with the original determination.

Also, very important—after considering a disagreement, you should notify the worker of the decision. Failure to respond within 45 days will result in the worker’s income tax and national insurance contributions becoming your responsibility.

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