With the reform to the IR35 legislation coming to the private sector in April 2020, now is the time to start preparing. With the onus of assessing compliance to this tax law now shifting to the fee-payer (be that your business if you engage directly, or your recruitment agency partner) rather than the individual contractor themselves. Failure to prepare could result in hefty fines, increased costs or loss of talent.
However, this process doesn't need to be difficult! There are some simple tasks you can do right now to start this process:
Work out if your business will be affected.
These reforms are first being rolled out in the private sector to medium and large businesses. That means if you qualify as a small business then you don't yet need to make any changes.
A business is deemed to be 'small' if it meets 2 or more of the following criteria within a 12-month period:
- Turnover not more than £10.2 million
- Balance sheet total not more than £5.1 million
- Fewer than 50 employees
As a tax legislation, this also only applies to contractors, so you will only need to consider this if you are actively engaging contractors who will still be working on the April 2020 deadline.
Map out the operating structures of your contractor workforce.
If you don't classify as a small business you need to move on to the next step, which is understanding the contractor base you have.
The legislation is aimed at targeting 'disguised employment' of those working as a PSC (Personal Service Company) also known as Limited Company Contractors.
It is essential that you understand which of the contractors in your business are operating in the way so you can assess their roles. Other operating structures that could be in place are:
- All PSCs (high risk)
- PAYE Umbrella (no risk)
- Direct PAYE (no risk)
- Agency PAYE (no risk)
- Other* (high risk)
*if you don't know how the contractor is operating, this is also high-risk, and we would recommend moving on to the next stage for these individuals too.
It could be that you don't have access to this information, especially if you're working with a recruitment partner, so you may need to request this information from them. With this information you will then be able to work out which roles in your business are high-risk, and make the necessary preparations.
Use the CEST tool to assess high-risk roles.
CEST (Checking Employment Status for Tax) is a tool from HMRC which allows you to answer a series of questions about a role to assess if they would fall inside or outside IR35.
You only need to do this for every role type, not every contractor, providing that they are managed the same, and you will likely need to work closely with the Hiring Manager/Line Manager of that role to gather all of the information you need to be able to complete the questions.
If this tool considers the role to be inside of IR35 and you have contractors operating via a PSC, you will need to start communicating with them that they will need to change the way they operate from April 2020.
If the role is deemed to be outside IR35, great! This means that your contractors working via PSCs are compliant and will not need to make any changes to how they operate. We recommend that you produce an SDS (Status Determination Statement) and share this with the worker and their relevant the recruitment agency. This is your defence in the event of a claim from HMRC.
You can find more information about the next stages of preparing for IR35 and more detail about what the reform involves in our whitepaper: IR35 in the Private Sector - How to Prepare for April 2020. Click here to request your copy.