IR35 – what is changing and what you need to do

What is IR35 and what is changing?
What must businesses do before April 2020?

The government is committed to cracking down on disguised employment. In order to achieve this, the IR35 rules will change from April 2020.(1) Businesses that engage contractors (or off-payroll workers), whether directly or through an agency, who are providing their labour through an intermediary, such as a personal services company (PSC) (ie, a company owned and controlled by the contractor), must make changes well ahead of April 2020.

What is IR35 and what is changing?

The IR35 rules apply where contractors personally provide services via an intermediary (eg, a PSC). However, if the contractor is directly engaged, they would be considered an employee or office holder for tax purposes.

Currently the PSC or intermediary must consider employment status and account for pay-as-you-earn (PAYE) and national insurance contributions (NICs) where necessary. From April 2020 that is changing and, instead, businesses must assess employment status and operate PAYE and NICs as appropriate.

For example, if a business engages a contractor through a PSC, they must:

• assess the individual's employment status (eg, if the business engages them directly would they be an employee for tax purposes?);
• notify the contractor of their decision and provide reasons; and
• operate PAYE or NICs on the fee paid, excluding value added tax (VAT) if they determine that the individual would be an employee; notably, the business must also continue to pay VAT on the gross fees.

The changes will also apply to more complex labour chains, so an early understanding of the labour supply chain is critical.

What must businesses do before April 2020?

Before April 2020, businesses must:

• review and audit their labour supply chain to understand which contractors are using intermediaries and therefore are potentially within IR35;
• decide who is responsible for implementing the new IR35 rules and ensure that they are properly trained;
• determine how to assess each off-payroll worker's employment status to ensure that the business has a clear and consistent methodology;
• assess the status of each existing off-payroll worker for whom they may pay fees after March 2020 and start talking to them (rates may need to be renegotiated for off-payroll workers that the business wants to retain);
• amend all existing contracts with off-payroll workers (both those who were assessed to be employees and those assessed as genuinely self-employed);
• ensure that all new contracts are drafted to anticipate the new IR35 rules and develop an on-boarding process which ensures that a proper employment status assessment is made before work is started;
• ensure that payroll and accounts payable systems can cope with the changes (and that the business can operate both VAT and PAYE or NICs, where appropriate); and
• review their policy on whether to conduct right to work checks for off-payroll workers.

For further information on this topic please contact Lucy Lewis or Victoria Goode at Lewis Silkin by telephone (+44 20 7074 8000​) or email (lucy.lewis@lewissilkin.com or victoria.goode@lewissilkin.com). The Lewis Silkin website can be accessed at www.lewissilkin.com.

Endnotes

(1) More information about IR35 changes and the steps to be taken is available here.