What you need to know about the changing UK Off-Payroll Working (IR35) rules in 2021.
As per the latest announcement by the UK government on 20 March 2020, businesses with operations in the United Kingdom should be preparing for a relationship status change, because things are about to get complicated.
The changes in the off-payroll rule which were initially planned to come into effect in April 2020 have been delayed until April 2021 due to Covid-19.
Essentially, April 2021 marks the implementation of the UK’s updated IR35 legislation — which impacts hiring, status, and taxation of independent contractors.
Currently, when you use UK contractors through their own limited companies, or PSCs (personal service companies), you can classify the individuals as either consultants or employees, for the purposes of taxes. The burden of ensuring the correct classification has always been with the PSC — typically the contractor’s personal company.
What’s Changing?
As of April 2021, that burden will shift to you, the client. All large and medium-sized businesses will be responsible for classifying the employment status of contractors with PSCs, and will be required to follow a new set of administrative procedures to ensure compliance.
Instead of simply paying an invoice from your contractor, you — as the “fee payer” — will become responsible for any payroll taxes incurred when an individual should have been properly classified as an employee. That means, for any contractor who should be classified as an employee, you will need to collect income tax and employee National Insurance contributions.
The purpose of the new IR35 regulations is to require that contractors — who do not fall within the HMRC criteria as self-employed and are essentially employed through their own companies — pay equivalent taxes, fees, and NIC contributions as standard employees.
The British government estimates that the changes will affect at least 80,000 contractors, which many believe is an understatement. Either way, it means there are many businesses that are likely to feel some impact, particularly global businesses with activity in the UK.
How Can You Prepare for the IR35 Changes?
If you work with contractors in the UK through PSCs, you will want to take the following steps before April 2021:
- Determine whether the new IR35 rules apply to your company
If you do not work with any independent contractors, and do not expect to, these changes will not affect you. Also, if you are a small business, you may also be in the clear. The extended rules will apply only to large or medium-sized businesses — if your business has more than 50 worldwide employees, a revenue of more than £10.2M, or a balance sheet exceeding £5.1M. Any two of those conditions means the legislation applies to you, so keep reading. - Evaluate the status of your contracts with PSCs
Compile and assess the arrangements you have with all contractors that will extend past April 2021. Review those contracts and flag any cases of external workers whose working arrangements may need a closer look. Though the UK government has provided some tools for this assessment, the accuracy of those tools has been called into question. Therefore, a tax expert to help navigate this is essential to any assessment. - Determine and communicate your policies
The classification change is inevitable, but it will be up to you to decide what to do to ensure compliance. Will you bring your contractors on as part-time workers or as full-time employees? Will you adjust contracts so that they can no longer be classified as employees — with all that it entails? Or will you choose to terminate these contractors? Whatever you decide, ensure that your employees who have relationships with these contractors are aware of the process, and adequate communications are made internally as you proceed. - Prepare your SDS Forms
For every current PSC relationship as of April 2021, you will need to issue a status determination statement (SDS) that will notify the contractor and any other stakeholders of your determination. In some cases, directly hiring the contractor as an employee may make more sense than going through the process of determining status and issuing an SDS. The SDS will include a notification of whether that person should be classified as an employee, along with reasons why. It will serve as notice that they will be classified as such going forward — with any changes to the relationship that would entail. - Settle disputes
If any contractors disagree with the SDS you have issued to them, all stakeholders should follow a dispute resolution process — ideally augmented with the help of experts. - Renegotiate the relationship
Once you have sorted your contractors, you will want to revise some existing arrangements to comply with IR35. Even if you don’t contract with the workers directly, remember that you can be held liable for non-compliance by ANY link in your employment supply chain. These changes may also result in increased taxes and fees, so you may need to work with those contractors to renegotiate terms or payment rates, or determine who will bear the burden of those increased costs.
The Bottom Line: Three Takeaways
- Hiring a contractor through a limited company (PSC) in the UK will not protect your business from legal and financial responsibility.
While past IR35 rules either did not apply to your company or the responsibility did not fall on your shoulders, the regulatory environment has changed. - You must act now to evaluate your working relationship with contractors who work via a PSC.
With a spotlight on all businesses that work with contractors via PSC in the UK, it is imperative to act quickly and proactively to reduce the risk of non-compliance before rule changes take effect. - You can easily and quickly alter the status of a UK contractor to full-time employee by hiring through an Employer of Record, protecting your business from the impact of IR35 rule changes.
If you wish to retain your contractors who work via PSC in the UK, you must have an entity established in order to run payroll and offer a compliant benefits package. To set this up requires significant time, money, and expertise.
Looking for Help?
If the whole situation with IR35 feels complicated or burdensome, remember that you don’t have to tackle it on your own. An alternative is to hire individuals through an Employer of Record (EOR), where their status as employees is clear, and all required payroll and withholding taxes are accounted for and paid by the EOR.
Depend on an EOR like Globalization Partners. We put your talent on our fully compliant payroll, offer complete benefits packages, and the employee works for you on a day-to-day basis. It’s a fast, simple solution that allows your company to access talent in the UK without concerns about IR35 rule changes, costly entity setup, or ongoing compliance matters. Please reach out to us if you need help. We’d be happy to walk you through the process and show you how we shift the burden from your team’s shoulders to ours.