The Government’s decision to extend the existing IR35 rules to the private sector has been a cause of concern for many organisations who will suddenly find themselves faced with a significant increase in their financial responsibilities and compliance demands.
Despite the government’s original deadline of April 2020 being extended to the 6th April 2021, many of the affected organisations still feel unprepared for this shift in responsibilities: A survey by Sullivan and Stanley found that 71% of people surveyed were unaware of the original deadline, with a further 54% feeling as though they hadn’t received enough information on the changes. This confusion is a cause for anxiety for many in the private sector who feel as though they are unable to formulate an effective compliance strategy to meet the new legislation.
With this seeming lack of clarity around the changes, we at Advanced felt it might be a good idea to run through the IR35 changes and what exactly it means for your organisation and people as we move further into the new financial year.
What is IR35 compliance?
At its core, the IR35 rules are the legislation surrounding compliance for off-payroll workers. Simply put, these rules apply to workers who are providing a service to a company either via their own private company or as a contracted intermediary. These rules exist to ensure that workers who would have been classed as an employee were they providing the service directly to the client, are contributing roughly the same amount in tax and national insurance contributions as employees.
The legislation is designed to mitigate instances of tax avoidance whereby organisations could take advantage of gig economy workers and other similar contractors by having them do the equivalent work of a salaried employee but with fewer HMRC contributions. The new rules will ensure transparency around the use of contractors or intermediary firms, but the changes do bring with it a greater burden for payroll and financial professionals who will have to ensure that their organisations remain compliant.
Similar regulations have been in place in the public sector since 2017 and as of April 2021, medium and large-sized businesses in the private sector will now be responsible for calculating any national insurance or tax contributions for any contractors that fall within the IR35 rules.
What is the criteria for IR35?
The latest legislative changes are coming into effect for large and medium businesses in the private sector. These types of organisations are defined in the Companies Act 2006 as:
- Having an annual turnover of more than £10.2 million
- Consisting of more than 50 employees
- Having a balance sheet total of more than £5.1 million.
Any organisations that meet these criteria will need to be aware of the changes in legislation and ensure full compliance and transparency regarding the employee status of any contractors or intermediaries used.
HMRC have defined workers within 3 criteria: – ‘personal service and substitution’, ‘supervision and control’ and ‘mutuality of obligation’. Whilst this is by no means an exhaustive list, these criteria are designed to help organisations determine which workers may fall under the new regulation changes. For further guidance, organisations are recommended to consult the Government’s, CEST Tool.
Who is responsible for IR35 compliance?
Whilst business owners are responsible for the overall oversight and compliance of their organisations, the IR35 changes will most fundamentally impact the workload and responsibilities of payroll and HR professionals. These individuals will be tasked with ensuring that their organisations remain compliant and transparent regarding any HMRC contributions.
The changes do bring up interesting questions surrounding third parties and their expected contributions. The new rules emphasise that in most instances, End clients will generally be responsible for determining the employment status of any contractors used and ensuring any appropriate contributions are made.
When working with agencies, end clients are expected to determine the IR35 status of the workers involved. The agency would then be provided with a deemed employee payment which will then have the appropriate HMRC and NI contributions deducted.
HR and payroll leaders will be crucial in ensuring that businesses avoid issues of non-compliance. By carrying out full audits of any contractors or agencies used and developing policies and agreements ahead of time, businesses will be placed to meet these changes and avoid any negative impact from a lack of compliance.
Whilst these changes may seem daunting, the adoption of new technology and systems can help make compliance as seamless as possible. Our suite of Advanced HCM systems are designed to give you the accuracy and oversight you need in order to embrace the upcoming changes.