Unless you have been living under a rock, you will know that the private sector off-payroll working rules have been in place since April 2021.
Commonly known as IR35, the rules state that any business engaging contractors who work through their limited company, i.e., a personal service company, will be responsible for determining if the latter is employed or self-employed for tax purposes.
Affected businesses did not have to pay penalties for inaccuracies in the first 12 months, starting April 2021, relating to the off-payroll working rules – irrespective of when the inaccuracies were identified.
Now that HMRC’s relaxed stance on penalties is no longer available, the taxman has started fining businesses for mistakes in applying the working rules from 6 April 2022 onwards.
Who is not subject to the new off-payroll working rules?
Small private-sector contractor companies are not subject to IR35 compliance. On the other hand, medium and large-sized private sector contracting businesses are responsible for determining the status of any contractors they may use.
The business size classification is based on the Companies Act definition, and every business needs to review its size annually. This is an important practice to follow every year, especially if a business has been bought by another organisation or has simply grown in size.
It is also a good idea to confirm small company status with the contractors, who are accountable for determining their employment status.
When do off-payroll working rules apply?
Every client (business) and contractor agreement must be assessed to determine whether the IR35 rules apply. Some contracts could be subject to the rules, and others are not. You have to look into it individually.
Either the client or intermediary decides whether the IR35 rules apply. However, generally speaking, if the contractor providing the service could be classed as an employee if they were contracted directly, then the off-payroll working rules will apply.
To help you determine the status, HMRC created a Check Employment Status for Tax (CEST) tool. However, that has fallen short of expectations, and many businesses have found themselves in hot soup because of wrongly interpreting and applying results from the CEST tool.
On the other hand, businesses who try to avoid any IR35-related complication through blanket status determinations on the status of their contractors are always at a risk of failing to meet the obligation of assessing individual contracts.
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How can you remain compliant with IR35?
The easiest way is to get a quick consultation with Bradleys Accountants. You see, HMRC requires businesses engaging contractors to include an “off-payroll worker” indicator within their payroll software.
That means now is a good time for you to check whether the payroll software you are using to pay contractors includes this data field and if it is being used correctly. Alternatively, you can change your payroll supplier to one that definitely uses payroll software with the off-payroll worker indicator such as Bradleys Accountants.
HMRC has also been sending out compliance letters to large businesses in industries such as financial services and oil and gas querying their application for IR35, including how they determine employment status and the process of deciding whether to outsource work.
Fret not – the taxman will continue assisting businesses that engage contractors. However, they will clamp down more firmly on those who deliberately breach the rules. Remove all doubts.
The off-payroll working rules are not straightforward.
In the instance that an individual contractor has not complied with IR35, they could be subjected to penalties. Penalties can include the request to pay late payment fines and additional interest in addition to paying outstanding national insurance.
On the other hand, when clients (businesses) have neglected to comply with IR35, they will be asked to pay the late payment fines and any additional interest. HMRC can also send penalties for up to 100% of the outstanding amount.
An NAO (National Audit Office) report states that when the off-payroll rules were introduced for public sector businesses, departments managing the engagements with the contractors struggled to assess the employment status. Failing to administer the reforms correctly racked up a whopping amount of £263m in penalties paid or in additional tax due.
Review your position with Bradleys
There has never been a better time to take stock of your options. Should you consider restructured work arrangements or renegotiating fees?
Do you think you can make the contracts clearer? Please get in touch with Bradleys Accountants for particular advice on your options and tax consequences. We hold a lot of experience in helping businesses become IR35-compliant.