How should I prepare for IR35?

Many businesses spent the first two months of 2020 planning for the implementation of IR35; then Covid-19 shifted the world and IR35 was delayed until April 2021.  While Covid-19 continues to dominate the economy, the official word from the Government at the time of writing this article is that it will proceed and come into effect in April 2021.  Organisations should therefore be acting now and start to prepare for this change, or they could face significant financial and reputational consequences from HMRC. Natalie Rawson, Associate Solicitor in our Employment team, explains more here about the change and how we are supporting businesses to prepare now.

What is IR35?

The off-payroll working rules or IR35 became law via the Finance Act in 2000. The Government’s aim was to clamp down on the growing use of ‘one-man-band limited companies’ to provide professional services to clients, where the individual was still working in a manner akin to a traditional ‘employee’, while enjoying the tax benefits afforded them by a corporate structure. IR35 rules do not apply to the genuinely self-employed.

When the coalition Government came in to power in May 2010, George Osborne introduced the creation of the Office of Tax Simplification department who were tasked with identifying new ways of improving IR35.

On Budget Day in 2016, the Government then announced that there would indeed be a clampdown on so-called ‘off-payroll working’ within public sector organisations which came into effect in April 2017. In essence, public sector clients became responsible for determining whether or not their workers were caught by IR35. If they were deemed to be ’employees’ and not ‘contractors’ after all, then the public sector client became responsible for operating IR35 and deducting PAYE and NICs from any caught workers.

The 2017 reform raised an additional £550 million in the first 12 month’s that it was introduced which, we suspect, forms part of the reason why these rules are now being extended. In October 2018, the Chancellor announced an extension of the existing off-payroll working rules to the private sector, which is now due to come into force in April 2021.

Who will be affected by the IR35 change in April 2021?

In addition to public sector clients, IR35 will now apply to those medium and large organisations in the private sector, which will include charities. Organisations will be responsible if they engage individuals who work through their own company and two or more of the following conditions are met: 

• An annual turnover of more than £10.2 million
• A balance sheet total of more than £5.1 million
• More than 50 employees

If the conditions are met then the organisation becomes responsible for determining the employment status of each individual currently described as a sub-contractor which will aid them in deciding whether IR35 applies.  

Those organisations need to provide a report to the individual carrying out the work and/or the company that the organisation contracts with, detailing the outcome and reasons for their determination. If the organisation decides that the ‘sub-contractor’ is in fact a ‘worker’ then the organisation becomes liable for tax and National Insurance contributions.

What to do if the decision is disputed

If the ‘sub-contractor’ disagrees with the decision the organisation will need to:

• Consider the ‘sub-contractor’s’ reasons
• Decide whether to maintain the original decision or not
• Provide reasons to the ‘sub-contractor’ within 45 days
• Keep a record of the decision

This could also lead to individuals bringing a number of claims before an Employment Tribunal, for example unlawful deduction of wages claims for unpaid holiday or sick pay.

For those that don’t meet the criteria, we would still recommend that they consider the employment status of each individual who is currently described as a sub-contractor, for several reasons:  

• The Government could decide that these rules should now apply to smaller businesses in the future.
• Sub-contractors’ are becoming very aware of their rights on employment status and if they also work for larger organisations where they have received IR35 reports informing them of their employment status they may expect the same from their smaller clients.
• You may fall outside of the IR35 rules but if your sub-contractors are in fact workers or employees, you could still be facing Employment Tribunal claims.

According to a survey recently published by IR35 Shield, an assessment tool, 52% of organisations are yet to be assessed for compliance with the new rules, and 23% have imposed a blanket ban on using limited company contractors. 

What penalties will there be for not complying?

The Government announced in February 2021, just six weeks ahead of the implementation of IR35, that there will be no penalties for the first twelve months as they recognise the impact Covid-19 has had on their working practices and aim to support businesses with the change rather than penalise them.  It has been confirmed that organisations will “not have to pay penalties for inaccuracies in the first 12 months relating to the off-payroll working rules, regardless of when the inaccuracies are identified, unless there’s evidence of deliberate non-compliance”.  For those where there is evidence of deliberate errors or overlooking the regulations, those businesses will be named in  a public record. 

In spite of this penalty waiver, this is only for 12 months so it is clear that organisations should be preparing now for the implementation of the changes to IR35 in April 2021. Determining employment status is a complex area and will be different on a case by case basis, as proven by the recent claims from individuals of businesses such as Uber, Deliveroo and Pimlico Plumbers.  We are now offering a bespoke service to businesses caught by IR35 in the production of their Status Determination Statement.  To find out more about how we can advise on IR35, you can contact Natalie Rawson on 023 8071 7403 or email natalierawson@warnergoodman.co.uk. 

To receive regular Employment Law updates from the team regarding recent tribunal cases and legislation updates, you can subscribe to our weekly Employment Law Newsletter by completing our subscription form or emailing us at events@warnergoodman.co.uk. 

ENDS

This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice.  All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article.