6th April 2021 brings changes to the off-payroll working rules, commonly known as IR35 in the UK. These could have a significant impact on any medium-to-large private sector organisations in the UK engaging the services of contractors through an intermediary. The changes were originally meant to be implemented in April 2020 but were delayed due to the global pandemic.
The 2021 IR35 reform sees a major shift in responsibility from the contractor to the end-client. April 6th sees the new legislation applied to all medium and large private sector organisations, which will bring changes across the requisition, engagement, and hiring processes for contractors and off-payroll workers.
The Main Change to IR35
The main shift is in the responsibility to determine if an off-payroll worker falls inside or outside of IR35. Prior to the change (and continuing for small businesses), this responsibility lay with the worker themselves. As of April 6th, the responsibility now sits with the organisations hiring them.
This could have big implications for medium and large private sector organisations as they will need to factor this in to any ongoing and future engagements.
Small businesses will continue to operate in the same way they do now. If you want to know more about the small business exemption, please see our previous article on the topic below.
RELATED READING | ‘What is IR35 and Will I Be Impacted?’
How Does the New IR35 Process Work?
The off-payroll working rules were introduced to ensure contractors who are ultimately working like employees but through their own limited company (often a ‘personal service company’ or ‘PSC’), or another type of intermediary (such as a partnership or individual) pay broadly the same Income Tax and National Insurance contributions (NICs) as individuals who are directly employed.
Under the current legislation, it’s the contractor who must determine the status of their engagement (with the client) and if the rules apply. The PSC is then responsible for providing an IR35 calculation to HMRC to ensure they are paying the correct amounts of tax and national insurance that the client would pay if they were engaged on a PAYE basis.
Compliance by PSCs has been estimated by HMRC to be as low as 10%. IR35 reform will dramatically increase compliance and could, in effect, net the exchequer an additional £1 billion+ a year in income tax and NICs.
YOU MIGHT ALSO LIKE | ‘Contingent Labor Trends for the Future [infographic]’
Who Needs to Be Assessed?
For medium to large private sector organisations, employers will need to individually assess every contractor role they currently have in place and consider every new engagement after April 6th to determine if the off-payroll working rules apply. The status determination statement (SDS) must then be communicated to the worker directly and to any third-party the client contracts with (for example, an agency). Once completed and the client has taken all reasonable care when coming to its conclusion, the client has effectively satisfied its duties under the rules.
While there may be a temptation to create a blanket rule for all of your off-payroll workers, some organisations have already tried this and it has backfired. For example, some banks made the decision to class every off-payroll worker as inside of IR35, and created significant tax increases for them, leaving contractors with a hard decision to make: face pay cuts or leave their roles.
The way organisations handle this can have a significant impact on the retention of their contingent workers.
MORE FROM THE BLOG | ‘Contingent Workforce Programs: 11 Goals to Set You Up for Success in 2021’
The Impact on Attracting and Retaining Workers
As well as the additional administrative work required to remain compliant with the new legislation, employers also need to be aware of the impact this can have on attracting and retaining off-payroll workers.
These changes will mean that workers who fall inside IR35 will be paying a higher rate of tax on their income. This could mean that without an increase in rate offerings, employers may find it harder to attract talent for their roles. Additionally, contingent workers may cease to work with employers and seek opportunities elsewhere where they may be more likely to fall outside of IR35.
If reducing reliance on contingent workers is not an option, it may be worth looking into cost savings in other areas of your contingent workforce management program. A vendor management system is a great start, and if this is something you are already using, then a number of integrations can also help to save you time and money.
RECOMMENDED READING | ‘3 VMS Integrations That Can Save You Time and Money’