Big changes are being made to the IR35 tax legislation, which will affect the way you hire contractors. To help ensure you’re compliant with the new legislation, we’ve put together a quick guide to answer the most common questions.
What is IR35?
IR35 is tax legislation designed to assess whether a contractor is a genuine contractor rather than a ‘disguised’ employee, for the purposes of paying tax.
- Contractors ‘inside IR35’ are considered, for tax purposes, an employee of the organisation, and therefore subject to PAYE.
- Contractors ‘outside IR35’ are operating as a genuine business, and therefore outside of the IR35 rules.
Currently a contractor is responsible for determining whether they are ‘inside’ or ‘outside’ IR35. From the 6th April 2020, this will change, and the end client will be responsible for deciding whether a role is ‘inside’ or ‘outside’ IR35.
Who is affected?
The changes will apply to medium and large private sector businesses only. Businesses will be excluded if they meet two or more of the Government’s criteria for a small company:
- turnover of £10.2m or less;
- £5.1m or less on its balance sheet; or
- 50 employees or less.
What do the changes mean for you?
From the 6th April 2020, the following changes to the IR35 tax legislation will come into effect:
- You will be responsible for determining the IR35 status of contractors you’ve hired, are planning to hire, or planning to extend.
- You will be required to provide a clear, overt, relevant and detailed project description for each contract and/or extension.
How do you determine a contractors IR35 status?
One way to determine the IR35 status of a contractor role you wish to fill or extend is to use the HMRC CEST tool.
Once you’ve used the tool to determine whether the contract role lies ‘inside’ or ‘outside’ of IR35, you must provide the agency (Vector) and the worker with a Status Determination Statement.
What is a Status Determination Statement?
A Status Determination Statement (SDS) is a detailed statement from the client to the agency and contractor that:
- Declares whether the contractor role falls ‘inside’ or ‘outside’ IR35 following a thorough IR35 assessment (CEST tool).
- Provides detailed reasoning for reaching the conclusion.
If you don’t provide the agency and the contractor with a SDS, the tax liability falls onto you, and you will be required to pay the tax deductions and NICs.
What do the changes mean for your current contractors?
If your current contractor’s role is deemed ‘outside’ of IR35, it’s business as usual.
However, if their role is deemed to be ‘inside IR35’ there are some important things to consider.
- The contractor will have the right to challenge the status, and you will be required to provide a response within 45 days. If you don’t, the tax liability will be passed on to you.
- The contractor will now be required to pay 13.8% in NICs and restructure their tax contributions. This may result in us undertaking further negotiations to the day rate in line with the new legislation.
How can Vector support you?
The new IR35 regulations require change from you as the client, us as the agency, and our contractors.
We are here to support you through the transition and are happy to offer the following services:
- We’ll be booking appointments to visit you if you are an existing client and run you through the new legislation and requirements in person.
- If a role is determined to be ‘inside IR35’ we can help transition a contractor into a permanent employee if it suits both parties.
What internal process changes should you make
- Avoid using blanket assessments of similar roles
- Review each contract role individually on their own merit
- Always provide the SDS before the contract starts
- We suggest creating an internal SDS template to increase efficiency and consistency
Don't hesitate to pick up the phone
With the right planning, the changes to IR35 needn’t be a headache. If you have any concerns please pick up the phone to your Vector advisor.
We’ve thoroughly planned for the changes, and are well equipped to help you every step of the way.