Debbie Sadler, senior associate in our employment team, recently spoke to Raconteur about how business owners can prepare for the changes to IR35 set to be introduced in April. The article, for the Raconteur Future of Work report in The Times can be found on page 19.

Below, Debbie expands on her discussion with Raconteur and outlines the new IR35 regulations, what they mean for business owners and what they can do to prepare.

The new regulations

IR35 refers to tax legislation that applies where an individual worker provides their services to an end user through an intermediary. It has existed for many years but, in April 2017, it changed to incorporate the off-payroll working rules.

The purpose of this change was to tackle perceived tax avoidance by ensuring that any qualifying worker operating under these arrangements paid income tax and National Insurance Contributions at levels broadly equivalent to that of an employee. PAYE and National Insurance Contributions were also imposed on the intermediary.

The regulations have applied to the public sector since April 2017 and were due to be extended to all medium and large private sector clients (including some charities and third sector organisations) from April 2020. However, this implementation was delayed until 6 April 2021. From that date, those organisations caught by the regulations will be responsible for determining their workers’ employment status, i.e. whether those working for them are ‘workers’, or ‘employees’. This has implications for the amount of tax to be paid.  

Given the commercial ramifications of this change, it is important that both organisations that use professional contractors, freelancers, interims or consultants, and those who offer their services in this way take time to understand how the legislation works and its implications, (if any), for their businesses. However, a recent survey, conducted by IR35 Shield, clearly illustrates that many are not yet prepared for the new rules.

How business owners can prepare

It seems many businesses have been heavily focused on dealing with the economic impact of COVID-19, and the new rules have not been high on their agenda, but it is paramount that business owners consider how their organisations may be impacted come April.

If a worker provides services to a small private organisation and the off-payroll working rules apply, the business will be responsible for deducting tax and National Insurance from the worker’s fees and paying them to HMRC.

All public sector authorities and medium and large-sized private sector clients will also need to determine if the rules apply to their workers.

Businesses must be aware that if the new IR35 tax rules apply to them, they can expect to pay around 25% more in tax per year. They should take time over the next few months to understand how the legislation works, apply best practices to remove the risks and prepare defence in case of an investigation by HMRC.

We are likely to see some serious repercussions for hirers and contractors who fail to prepare for compliance. Many are already applying blanket rules to negate their compliance obligations and we may see a variety of disputes and recruitment issues arise as a result.  

Any business owners who are unsure about how they should approach their IR35 preparations should seek guidance from a professional who can help them understand the new regulations and ensure they are compliant. For further information or advice please contact Debbie Sadler