From 6 April 2021, under the planned changes to off-payroll worker tax rules (IR35), certain organisations who engage contractors directly or indirectly in their supply chain will be responsible for determining the tax status of contractors who provide services through their own personal service company (PSC).

This essentially shifts the tax status determination burden from the PSC to the end client organisation (i.e. the business who gets the benefit of the contractor’s services). In addition, where IR35 does apply, the entity who pays the PSC (the fee-payer) is obliged to collect income tax and national insurance on behalf of the PSC, and must make the relevant deductions from the monies it pays the PSC. Sometimes, the end client and fee payer will be the same organisation but, where an agency is involved or there is a more complex supply chain, this won’t necessarily be the case.

If you have not already done so, time is of the essence for businesses to prepare for the April 2021 deadline.

With that in mind, Ronnie Brown provides his top 10 tips on preparing for IR35 to assist your preparations:

1. Establish whether the IR35 regime applies to your business. This test is twofold: does your business constitute a “medium or large-sized” company for the purposes of the IR35 regime; and, if so, does it engage directly or indirectly with contractors who work via PSC arrangements?
2. Put in place a cross-divisional team that has the remit of preparing for IR35 changes. Whether it’s operational, legal, financial, HR or communications, varied expertise will be required to properly assess, prepare for and manage a business’ overall strategy to IR35 changes.
3. Carry out a project mapping exercise to establish:
   • which departments, divisions or parts of your business are heavily reliant on contractors;
   • how much the business currently pays in respect of each contractor, and to who;
   • where you sit in the supply chain e.g. are there agency arrangements in place or not; and
   • the extent to which each contractor’s skills are integral to your business.
4. Choose a reliable status determination process to determine if your contractors ought to be taxed as inside or outside IR35. HMRC has developed guidance and an online tool to check deemed employment status (known as the CEST tool). However, there has been some criticism of the CEST tool, and many businesses are choosing to develop their own assessment questionnaires, considering both the contractual arrangements and an analysis of what actually happens on a day-to-day basis.
5. Allocate responsibility for carrying out the status determination to designated individuals within your business, and ensure proper training is provided to those individuals to allow them to carry out the assessment exercise correctly.  Be sure you leave sufficient time to carry out the determinations before the new rules come into effect or a new contract is entered into.
6. If the result of your determination is that a contractor is a deemed employee under IR35, consider your next steps. Rather than continue with your current arrangements, it may be better for you to employ the contractor directly, or to engage him/her as a worker via a managed services (umbrella) company. There are likely to be financial implications and be prepared for possible rate negotiations. Depending upon the arrangements going forward individuals may be afforded employment rights. You should carefully consider the advantages and disadvantages of the different options available.

   If you proceed in such a way that IR35 will still affect your business, the following tips will also assist:

1. There is a right of appeal in circumstances where either the contractor or the fee payer does not agree with the engaging business’ employment status determination. The end client has just 45 days to respond to any appeal, so this ought to be factored into your overall planning process.
2. Review your internal systems (e.g. onboarding systems) and ensure that your payroll software and processes are fit for purpose.
3. Review your contracts and think about what types of indemnities and protections may be required. You may also need to re-negotiate/reduce contract rates to take account of the tax being paid by the business going forward.
4. Finally, consider preparing an IR35 policy, which explains what the regime means for your workforce and clearly sets out how your assessment and appeal procedures will operate in practice – and don’t forget to keep the position/assessment of your contractors under regular review going forward.

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