Following the devastating effects of Coronavirus, businesses are starting to expand and increase their workforces. However, employing a worker can come with additional costs to consider, such as the compliance with PAYE and pensions rules.
Prior to 6 April 2021, if a private company engaged a worker on a consultancy basis via the worker’s own Personal Service Company, there were no requirements for the engaging company to determine the employment status of the worker. However, from 6 April 2021 certain businesses will now need to consider the new IR35 rules.
What is IR35?
IR35 originally referred to tax legislation, effective since April 2000, that aims to prevent people avoiding tax by using an intermediary (such as a limited company) to provide services to a client, when they would actually be an employee of the client’s company were the intermediary not used.
Since then, the term has continued to be used to refer to further new legislation that is aimed at tackling off-payroll working in a different way.
The IR35 rules are designed to ensure that workers providing employee-like services through a Personal Service Contract pays a similar amount of tax and NIC as an employee.
IR35 – The onus on the company engaging the worker
From 6 April 2021, the onus to decide if someone working through their own Personal Service Company is caught by IR35 and should be classed as a ‘deemed’ employee now rests with the firm engaging the worker, unless that business is classed as ‘small’.
If they determine that the worker is an employee, the engaging body must deduct PAYE and employee National Insurance Contributions (NIC) from any payment made to the Personal Service Company.
Is my business at risk?
A business which is defined as ‘small’ will be excluded from these rules. To be ‘small’ the business (or its group if it is a subsidiary company) needs to meet two of the below three tests:
- Turnover of £10.2m or less
- £5.1m or less of gross assets on its balance sheet
- 50 employees or fewer
If your business is classed as ‘small’ for these purposes, then these rules will not apply to you. However, if your business is close to meeting any of these tests, then it would be advisable to start looking at the IR35 rules and reviewing any agreements/contracts with workers, to ensure a smooth transition should the business no longer be classed as ‘small’.
What does my business need to do?
For business that are not small who pay workers via an intermediary, they will be required to undertake the following:
- Determine the status of a worker. Each contract agreed with an agency or worker will need to be reviewed.
- Inform the worker or agency of your determination and the reasons for the determination.
- Keep detailed records of all status determinations, with the reasons for them.
- Design processes to deal with any disputes surrounding the determinations, a business must provide a response within 45 days of receiving a dispute.
- Ensure the correct amounts of NIC and PAYE tax are paid to HMRC by deducting these from payments made to Personal Service Companies where the status has been determined as being one of employment.
IR35 Penalties
Businesses must take reasonable care when making determinations about employment status of a worker. A failure to do so will make the business become liable for the worker’s tax and NIC liability that arises.
Failure to respond to a dispute within the required timeframe will also result in the business becoming responsible for the worker’s tax and NI contributions.
How can Shorts help?
Shorts have a dedicated tax planning team ready to support businesses and ensure their compliance with the IR35 rules. We can aid a business in determining workers’ employment status and liaise with workers and support you through any appeals process.
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Stephen Allender
View my articlesTags: Business Taxes
