IR35 reforms have been a popular (or not so popular) talking point for businesses over the last year, with the initial reversal in the Truss/Kwarteng controversial mini budget, which included the repeal of the IR35 changes, and all too quickly, we were back to the pre-April 2021 position. Then there was the subsequent U-turn of the reform in chancellor Jeremy Hunt’s Autumn statement. It is always possible that there could be another reversal, that’s politics, however, the key takeaway should be that IR35 reforms are here to stay and although there could be changes to how the rules apply in certain circumstances, e.g. contracted out services, managed services and agency involvement, as it stands, businesses will be required to continue to assess the status of their contractor population. Ignoring the rules is not an option and IR35 should remain at the forefront of employer’s agendas.
The Purpose of IR35 Reforms
The intention of the legislation is to ensure that Personal Service Companies (‘PSCs’) who are ‘deemed employees’ of their clients are paying the same amount of tax and National Insurance as they would if they were employed directly. Businesses obligations under IR35 vary depending on whether you are a ‘fee-payer’, ‘end client’ or both. Where the rules are applicable, the business deemed to be the ‘end client’ in the supply chain is responsible for conducting employment status assessments of any individuals in the chain operating through a PSC and they must communicate the outcome via a Status Determination Statement (‘SDS’). Where the outcome of the assessment is that the rules apply, the fee-payer must operate PAYE on the deemed payments to the PSC and become the secondary contributor for National Insurance purposes.
The Impact of IR35 Reforms
IR35 rules have been in place for the public sector since 6 April 2017, and HMRC have already carried out reviews of several public sector organisations, with NHS digital paying £3.95m in unpaid tax to HMRC, with an additional potential £552,000 penalty.
Last year the DWP (Department for Work and Pensions) were hit with a tax and National insurance bill of £87.9m for incorrectly determining the IR35 status of its contractors as outside IR35 when in fact they should have been withholding tax and NI at source as if they were an employee. Other departments facing penalties in the millions include the Home Office and HM Courts & Tribunal Services. IR35 reviews are proving to be lucrative for HMRC in the public sector, so it seems reasonable to assume they will soon extend this to the private sector.
Assuming that IR35 isn’t going anywhere soon, it’s important for employers to take the necessary precautions and considerations for off-payroll working.
The rules have been in place for private sector for over a year (since 6 April 2021), and now that HMRC’s soft touch approach to penalties in the reform’s first year has ended, we can assume that HMRC will revisit tackling IR35 compliance. Oil and gas, banking and finance sectors, were earmarked for compliance checks into their operation of the IR35/Off Payroll rules, with questionnaires making there way to Heads of Finance within those sectors, so surely other sectors are likely to follow?
How can we help?
IR35 presents many practical challenges for organisations, from identifying PSCs within the supply chain, interacting with agencies and umbrella companies, to completing and communication the SDS.
FPM can support at all stages, from one-off projects through to total management of IR35 processes. Some examples of areas where we can support are:
- Consultation on your responsibilities under IR35 (for example identifying whether a PSC is within scope or would be considered a managed-out service)
- Education of the workforce on IR35 risks and internal reference documents
- Identifying PSCs within the supply chain -remember those operating through intermediaries like agencies might still be within scope!
- Completing employment status assessments
- Contractor payrolls
- Reviewing current engagements and working arrangements to assess any high-risk exposure areas
- Key stakeholder communications, including communications tailored to employees and PSCs
If you have any queries regarding IR35 reforms, contact Ruth Emery or a member of our Payroll Team.