The new IR35 rules come into force for the private sector in April 2020. For project managers that hire contractors – or that take on contracts themselves – it will have a significant impact on their work.
“These new Off-Payroll tax changes introduced significant differences to the way the original IR35 legislation applied,” says Dave Chaplin, CEO of contactor tax specialist ContractorCalculator. “Historically, the contractor determined their own ‘IR35 status’ and was liable for all taxes if later deemed by HMRC to have arrived at the wrong conclusion. That has now changed.”
Here are the main changes, and how they might affect you.
The biggest change brought about by the changes to IR35 is employer’s National Insurance (NI). Under the original IR35, employer’s NI could be reversed out from the contractor’s fees. Under the new rules, NI will be paid on top of the worker’s earnings – the fees paid to the contractor must be treated as employment income.
“This hidden tax bomb has not been highlighted sufficiently,” says Chaplin. “To reinforce the stark reality – this is a new liability which increases the cost of hiring ‘deemed employees’ – contractors assessed as ‘inside IR35’ – by 13.8 per cent for employers NI and 0.5 per cent for the Apprenticeship Levy.”
It could increase costs for employers
Chaplin has calculated that, on top of the 14.3 per cent in tax obligations, costs for workers that are travelling for work with overnight stays are likely to be higher, as the new rules prevent workers from taking tax relief on expenses. For a travelling worker staying overnight four nights a week to get the same take-home pay, the cost of hiring for the client could increase by 43 per cent. This could have a significant impact on project budgets.
“From an analysis of the public sector experience, it is likely that those responsible for hiring contractors will over-react, try to force contractors to work on payroll, treating them as full-time employers for tax purposes, whilst trying to pass their new tax bills onto them,” says Chaplin. “This means a large rate decrease due to being treated like a ‘deemed employee’ whilst not being given any rights and benefits that go along with employee status.”
How to prepare for IR35
1. Assess your workforce
Look at the teams working or about to work on your project. How many are contractors? Will they be working almost exclusively on your project for its entire duration? Are they primarily working on site? You can use the government’s Check Employment Status for Tax (CEST) service to help determine which workers might come under IR35 rules. Key questions to ask yourself are:
- What are the worker’s responsibilities?
- Who controls their time – when, where and how do they work?
- How are they paid?
- Do they directly receive any benefits or expenses?
2. Review contracts
The contracts you have in place with itinerant workers will help you determine what your liabilities might be. Specifying the number of hours worked, where the individual can work or what they wear to work can be indicators of the level of control you have over the individual’s work. For those contractors to be truly self-employed, they must have a degree of independence from your project and organisation, such as being able to pursue other work.
3. Treat each worker individually
While some businesses have stopped hiring contractors entirely in a bid to avoid additional costs, this is not a fair approach and could result in litigation. Treat each contractor on a case-by-case basis and get a precise idea of what your responsibilities are.
4. Determine costs and identify risks
Calculate the potential increase in payroll costs off the back of the rule change. Assess how that might impact on the project’s budget, how you might need to adjust your workforce and identify any risks that might arise as a result. If contracts need to be terminated, make sure that you have legally responsible procedures in place to do so. Do this before the rules come into effect, as the change may mean you have to go through formal redundancy procedures to terminate some contracts.
5. Adjust procedures
Make sure that the procedures and governance around the hiring of workers is updated to reflect the new rules. These processes should make it clear to all parties what the nature of the work is, and whether IR35 rules apply.
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