Complying with the new IR35 rules when working with contractors
IR35, the framework for reporting cash-in-hand/off-payroll wages in the UK, is being reformed. Learn what's changing and how PARiM can help you stay compliant in the new regulatory environment.
In the UK, off-payroll working rules, introduced with the IR35 legislation, apply to contractors who provide personal services through their own individual limited company or via an intermediary such as a partner.
IR35 rules originally came into force in 2000. The purpose of creating these rules is to ensure that certain individuals who work as employees but operate via a personal service company (PSC) pay broadly the same tax and National Insurance Contributions (NIC) as an equivalent employee. So far, IR35 rules have not been effectively implemented as the PSC has been given the responsibility and freedom to ‘self-assess’ and decide whether the laws are applicable to them.
How we at PARiM can help you
At PARiM we offer workforce software with a unique focus on helping companies like yours with not only scheduling people but also with automating pay and charge (bill) rates for complex, mixed staff pools as well as helping to approve timesheets and processing pay runs.
This results in faster payroll processing with less errors and better communication between operations, finance and administration.
We offer a free demo where we tailor our solution to fit your needs in real-time. Helping you envision how you can improve your organisation..
The situation right now
Currently, the burden has always been on the contractor to ascertain whether IR35 applies. Should a contractor fail to determine the status or pass the status determination down the supply chain or exercise reasonable care in the course of determining the status, then the contractor may be responsible for the tax and NICs as they deemed “fee-payer.”
The big change
New IR35 changes, to be implemented in April 2021, will transfer responsibility to assess IR35 from contractors to mid-size and large companies that hire contractors. This follows similar reforms in the public sector done in 2017.
It is important to note that while these changes also apply to overseas employers dealing with contractors in the UK, companies having annual turnover below £10.2m and less than 50 employees will be exempt. However, if you operate an SMB that provides staff as a service to a larger firm, then you still need to make changes into account in your processes.
Ostensibly, for each contractor your company as the end-hirer will have to determine whether they fall "inside" our "outside" of IR35 by issuing a Status Determination Statement (SDS). The purpose of the Statement is to prove that the company as taken "reasonable care" to determine the status. In a working document HMRC has outlined ways you can prove "reasonable care":
Accurately applying and keeping a record of the employment status principles (ESM0500).
Accurately completing HMRC’s Check Employment Status for Tax (CEST) tool.
Applying HMRC guidance on determining status.
Seeking the advice of a qualified, professional advisor.
Having someone with a good understanding of the work to be undertaken involved in the determination process.
The effect on agencies and when working with agencies
In a work relationship where a recruitment or staffing agency stands between the end-hirer and the contractor, the end-hirer has to issue the SDS. However while the end-hirer issues the Statement, agencies will be the first contact-point for HMRC in case of questions regarding the determination. This means that regardless whether your company is an agency or an end-hirer – you need to work together with potential partners to ensure compliance. This graph from the JSA Group illustrates the change:
Using Employment Types in PARiM for classification
As a result of the reforms, your company faces the added pressure of correctly determining the classification of people and recording the determination in a logical and coherent way as HMRC can investigate and insist on back payment of tax, where it disagrees with your classification. In addition, it can fine you for late payment from the fee-payer.
A good way to keep records of your employee classifications is with our Employee Types feature. With it you can instantly comply with the first and the most important requirement of creating and keeping records of employment status principles without having to think twice about it.
In addition to being able to simply create a easy system of classification that confirms the way you do business with your contractors, an Employment Type in PARiM can have the pay and absence setting specific for a certain group of people attached to it – this not only takes care of IR35 for you but makes running payroll more frictionless and further ensures that the way you classify and pay your employees and contractors makes sense both internally and to external parties like the HMRC.
Combining Employment Types with HR Data Management
Employment Types along with our HR Data management solution combine to create an ideal solution for handling, storing and correcting compliance and HR information for mid-size and large companies. Here's a small video introduction into that featureset:
In particular, there are three concrete aspects that PARiM can handle for you:
Making determinations for a group of workers to save valuable time and keep things clear while remaining compliant: HMRC states in the working paper referenced above that: "It is acceptable for a client to make a determination for a group of workers, providing those workers are engaged under the same contractual terms and conditions, and in practice work under the same terms and conditions." (source)
Making it easy to comply with HMRC's requirement that "if there are any material changes to a worker’s terms and conditions, or working practices, making a new status determination" as well as the requirement that "reviewing the processes being applied and amending for future determinations when necessary" (source)
Finally, thanks to our smart HR data filtering system, complying with another essential requirement: "Checking existing individual determinations to ensure they remain valid / accurate" (source) becomes fast, simple and easy as finding the specific person and changing their status only takes seconds.
Book a free demo to learn more
Each of our experts has 5+ years of experience with workforce management issues and can offer practical ways to tailor PARiM to your needs.
Click here to schedule your free demo
Click here to try PARiM for free on your own