Understanding the UK's IR35 Legislation
The introduction of new rules around the IR35 legislation in the United Kingdom has payroll teams and self-employed workers trying to understand if and how they are affected. They’ll have to decide soon: from April 6, 2020, organizations receiving services from individual workers through their own personal service companies (PSC) or intermediaries must determine the status of those workers for tax purposes, and whether the “off-payroll working” rules of IR35 apply.
For many involved in processing payroll in the UK, as well as those responsible for contracting and managing contingent workers, the implications of the revised IR35 are confusing, if not worrying. Here, we'll take a closer look at what IR35 aims to accomplish and what it means for payroll teams and independent workers.
What is IR35?
Although IR35 is getting plenty of attention, it’s important to know that it is not new legislation. First introduced in the public sector in 2000, the law is designed to assess whether an independent contractor is genuinely working as a contractor or if they are working more like an employee – and thereby should be taxed like an employee.
The legislation’s record of poor compliance resulted in reforms being introduced in 2017 that shifted the responsibility for determining a worker’s status onto the company receiving their services, rather than leaving it up to the worker. Those reforms are now being extended to large and medium-sized organizations across all sectors, in an attempt to ensure that any individuals performing work in the same way as regular employees will pay the same tax and national insurance.
Who is affected?
According to statistics published by the House of Commons in December 2018, as many as 43,000 organizations may be affected by the changes. As such, it is no surprise that the reformed IR35 is causing some consternation within the private sector, and even drawing some radical responses that have been highlighted in the press.
It was reported in October that Barclays and other major employers planned to impose a blanket ban of off-payroll workers ahead of IR35 entering the private sector in April, irrespective of whether the individuals are operating as legitimate contractors. The move suggests a general fear of getting it wrong when it comes to managing off-payroll workers, with companies choosing instead to err on the side of caution.
What should employers know?
Organizations who rely on contingent workers to deliver critical services will need first to determine whether they will be classified as a medium or large business, per the guidance e provided by HMRC. If IR35 does apply, the organization will need to review all workers currently paid “off-payroll”, meaning via invoice, to determine their correct tax status ahead of April 2020.
The outcome of this review should be a Status Determination Statement that confirms the reasons for the status decision, a copy of which must be given to the worker and to the “fee payer.” This statement will also indicate how payment should be made to the worker, i.e., the gross value of the invoice or under deduction. Additionally, employers will need to introduce robust processes for assessing future contingent workers, to provide a consistency of approach to status determinations and to ensure long-term compliance.
In preparation for this reform, HMRC have been working with employers to improve the Check Employment Status for Tax tool (CEST), designed to help organizations reach a status determination. HMRC have stated that they will stand by any status determination made by the CEST tool, provided that the information used to complete the determination is considered accurate when subjected to a compliance check.
The difficulty of course, is ensuring that all hiring managers operating within the business are fully aware of the legislation and its reforms, understand completely their obligations in terms of collating a complete picture of accurate information, and willingly commit to not hiring any contingent workers until a status determination has been produced. No wonder then that organisations might choose to introduce a blanket ban on ‘off-payroll’ workers given how hard it might be to police this kind of activity on a large scale.
What will change?
Any worker determined to be a “deemed employee” must be added to the organization’s payroll, with the appropriate tax and national insurance amounts deducted from the value of their invoice (excluding expenses, materials, and VAT). The employer’s national insurance contributions will also be due, as well as apprenticeship levy contributions where applicable.
While it may sound simple, the reformed IR35 rules bring with them new complications to be addressed. To begin with, although the worker may be a “deemed employee,” they will not gain any employment benefits, such as statutory payments, holiday pay, or auto enrollment pension contributions. So in fact, they will potentially be treated very differently from the rest of the worker population, suggesting it may be prudent to operate a separate payroll to ensure the two definitions of worker are not confused.