New off-payroll rules for the private sector are now less than a year away, yet many employers have still not got to grips with the changes and how they will affect the payroll process.
Known more commonly as IR35, the rules are currently already in place within the public sector, where they have already sparked considerable controversy and several high-profile cases in the First Tier Tribunal – including a successful appeal lodged by the TV presenter, Lorraine Kelly.
From April 2020, where an individual is engaged by a medium or large-sized business in the private sector and works through a company, the employer will be responsible for assessing the individual’s employment status under the IR35 rules.
Where the rules apply, the business or agency will be responsible for deducting income tax and National Insurance contributions (NICs) via PAYE and will be required to pay employer NICs.
It is estimated that almost a quarter of the UK’s workforce now works on a contingent basis as a contractor or consultant, either in the public or private sector, and that the rules could lead to multiple requests for higher rates of pay or more permanent full-time roles to better reflect the requirements of IR35.
So far, many publications have focused on the employee-based elements of the new rules, but the cost and responsibilities enforced on employers is also significant and should not be underestimated or ignored.
The first step in preparing for IR35 is to conduct a full review of all staff and contractors currently working within a business, to try and identify which are bound by the new rules.
Other elements which might determine whether IR35 should be applied to a worker is their independence from the business and whether they are free to pursue other work outside of the company.
Effectively, this comes down to the element of control that a business or recruitment agency has over the employee.
Where it is clearly evident that they can apply whatever control required, such as the specific hours worked, the location of work or even what a person should be wearing during work (excluding apparel required under health & safety law), then HMRC may assume that despite being seemingly self-employed via their own private service company (PSC), they are in fact an employee of the business, whether temporary or not.
With so many workers likely to fall within the scope of IR35, it is important that employers take the time to consider the true cost to their business, as well as the additional payroll burden.
HMRC has made it very clear that IR35 is not intended to target people who are truly self-employed, and yet anecdotally many of those caught out by the new rules in the public sector had previously considered themselves to be self-employed.
Evidence suggests that some large employers have taken a blanket agreement to include all contractors under the rules to avoid a penalty or reputational damage. Unfortunately, for some employees, this means that they have been unfairly included within the scope of IR35.
Employees should take a cautious approach when applying the rules and take time to identify each person’s status on an individual basis.
Applying the rules inappropriately could lead to conflict with key members of staff and has the potential to lead to litigation against a company if a worker feels their new status means that they are unable to work for the business in future.