Whether you use the services of a consultant or are a consultant yourself, you’ll need to understand the ramifications of IR35 – and what you can do about them
From 6 April 2021, private and voluntary sector businesses with an annual turnover of over £10.2 million, a balance sheet worth more £5.1 million or more, and 50 or more employees, will be responsible for deciding whether IR35 applies, and for deducting tax and NICs from contractors’ fees paid through intermediaries when it does not. How should you respond?
Five initial steps to help your employer prepare for IR35:
Step 1: Decide who in your organisation will be responsible for ensuring that the business is compliant with the new IR35 regime, and ensure they’re suitably trained in making IR35 determinations. It could be you, or someone in Finance or Legal.
Step 2: Identify those supplying their labour through a Public Service Company (PCS) or other intermediary.
Contractors could be providing labour:
- direct as PSCs (that is, the contractor is a limited company)
- direct as sole traders (that is, the contractor is an individual)
- via a supply agency or other employment business as well as a PSC
- via a supply agency or other employment business as sole traders.
For IR35 purposes, you need to identify those who fall into categories (a) or (c).
Step 3: Audit the arrangements to assess which contractors fall within and outside of IR35. Ensure a clear and consistent methodology is used, decisions are recorded, and data is kept secure.
To help you make IR35 determinations, HMRC has created a Check Employment Status Tool (CEST), with supporting guidance. It’s designed to establish the three main factors used to determine IR35 status; namely:
- financial risk
However, there may be instances where determination won’t be binary and CEST can’t make a determination, in which case you might need specialist help in making a judgement.
While you’re not obliged to use CEST, it has the advantage that the result is binding on HMRC, provided all the relevant information has been correctly inputted.
Step 4: Communicate the determination, known as the Status Determination Statement (SDS) and the reasons for it to the contractor, their PSC and the agency. You’ll also need to give details of the appeals process that you’ve established for those who wish to challenge your SDS.
Step 5: Consider any documentation and systems changes that are required. For example:
- If necessary, review and amend internal processes for obtaining approval to use contractors.
- Review and amend (if necessary) on-boarding processes. This could include having an authorised list of supply agencies and ensuring there’s a signed contract with the PSC or supply agency before any work is done.
- Review and update template contracts for PSCs and supply agencies to incorporate IR35 changes and tax and status indemnity and warranty protections as appropriate. Ensure contracts reflect your status determination.
- Ensure that payroll and accounts payable systems can cope with the changes (and that VAT and PAYE/NICs can both be operated where appropriate).
Understand the possible consequences for independent HR consultants by visiting IR35 implications for consultants.
Charles Cotton’s article considers the implications of IR35, including the steps employers can take to prepare for the changes and how HR can help enforce it.
Information on determining a person’s employment status