On April 6th 2020, the long-standing rules surrounding IR35 will change dramatically. These changes – as outlined in the 2019-20 Finance Bill – will cause significant upheaval for companies that employ off-payroll workers.
The deadline may be approaching fast, but there is still widespread confusion about what the changes actually entail for organisations. More than half of private sector businesses admit they feel unprepared for the new measure, while 87% argue that HMRC could be doing more to support the transition.
Fortunately, help is at hand. We're here to talk you through the changes to IR35 and provide guidance on how best to work with service providers.
What is the background to the changes in IR35?
The legislation was originally introduced back in 2000 in an attempt to stamp out so-called "disguised employment" and prevent tax avoidance.
The idea is that a "true" service provider will sit outside IR35. A business in its own right, it should be responsible for its own tax and employment arrangements.
However, when a service provider conducts work for an organisation in a manner considered to be equivalent to an employee, it falls within IR35 and is therefore subject to broadly the same tax as any other on-payroll worker.
As of 2017, public sector organisations have been responsible for proving that service providers are truly self-employed, rather than disguised employees. Hirers are subject to hefty fines if they incorrectly identify someone as being "outside" IR35 when they should be "inside". This has resulted in several public bodies – including the Ministry of Defence, the NHS, and even HMRC itself – ceasing to use limited company contractors (or, in other words, service providers).
The impending change to IR35 will bring the private sector in line with the public sector. In other words, up until April 6th, service providers will continue to determine whether they fall inside or outside of IR35 themselves. But after the 6th, businesses will be handed responsibility for assessing whether or not a service provider should be treated as a genuine freelancer (outside IR35) or a fixed-term employee (inside IR35). As with the public sector, penalties for failing to identify a contractor as "inside IR35" will be substantial; so substantial, in fact, that the Treasury expects this new measure to earn it £1.3 billion per year by 2023.
Private sector businesses will only be exempt if they are deemed to be "small" by HMRC. Businesses are deemed to be small if they satisfy at least two of the following criteria:
- Turnover of no more than £10.2 million;
- Balance sheet total of no more than £5.1 million;
- No more than 50 employees.
How can Talent Point help companies around IR35?
It is clear that the private sector requires support in dealing with the upcoming change to IR35. Indeed, just 47% of businesses say they have taken action to address the move and are clear on the percentage of service providers working with them that would fall inside IR35, while 38% say they are "relying on gut feel alone". Even more concerning, 15% say they have "no idea at all" how they will be affected.
Talent Point can provide the assistance you need to fulfil your future IR35 requirements. Our services include:
1. Consultancy on existing contracts.
We will review your existing engagements and offer guidance on how to shape them so that they fall outside of IR35, meaning you will face less change as a result of the new legislation. Some service providers may need to be reclassified as fixed-term employees; we can also help to facilitate this.
2. Preparing Work Orders for new engagements.
A Work Order clearly outlines the terms of engagement between an organisation and a contracted service provider. It also incorporates a unique Status Determination Statement declaring their IR35 status. By establishing language that reflects the reality of an "outside IR35" service provider, a Work Order effectively sets ground rules for internal teams to ensure service providers are not treated like regular employees when, contractually, they are not. As such, if your organisation regularly works with service providers, implementing Work Orders can offer benefits from both a legal and cultural standpoint.
Not only does the Work Order set out the terms of the relationship between an organisation and a service provider – giving both parties a clear point of reference throughout the engagement – but it can also make it easier for the organisation and HMRC to determine their IR35 status.
Get in touch.
Our teams have extensive experience offering consultancy services to organisations around both recruitment and service provider engagement. We are well-equipped to provide you with the support and guidance you need to prepare for the changes to IR35 going forward.
To discuss your needs with a member of our team call us on 020 3011 1501, or email us at email@example.com.
- While Talent Point can offer guidance based on the Finance Bill and surrounding documentation, HMRC can challenge an SDS at any time for any reason. You should therefore also consult your own tax, legal and accounting advisers before engaging in any transaction or acting on any of the guidance provided in this note.