Complying with IR35: A practical checklist
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What is IR35?
IR35 is HMRC's approach to verifying the tax status of individuals who work for end users through intermediaries/personal service companies (PSCs).
Where the motive for that working arrangement is to reduce tax payments (in particular, employer's NICs, by far the biggest single tax cost to many businesses), rather than a genuine intent to be self-employed, HMRC is seeking to ensure these individuals are taxed appropriately.
With effect from 6 April 2021, the requirement to ensure working practices are compliant with IR35 is shifting to the end user.
This change will affect private sector businesses who use consultants/contractors, where those consultants/contractors operate through intermediaries, such as PSCs (Relevant Contractors).
Why are end users being targeted?
The changes are being introduced to make it easier for HMRC to ensure individuals pay the appropriate level of tax.
Before 6 April 2021, HMRC is required to pursue Relevant Contractors and their intermediaries for what are often relatively modest amounts of tax.
From 6 April 2021, these changes will allow HMRC to pursue large employers (engaging multiple Relevant Contractors) to recover the same tax for a fraction of the recovery (and administrative) cost to HMRC.
The ultimate target remains the individuals, whose tax status does not accurately reflect their employment status.
Am I caught by IR35?
For the new IR35 tax rules to apply, there are certain key components that need to exist.
The individual worker must:
i. personally perform a service;
ii. for an end user/client
iii. through an intermediary. The intermediary can be a PSC, limited company, agency, or partnership.
If your company uses contractors or consultants, you need to check whether your working practices include these kinds of arrangements.
There is a small company exemption from IR35 for end user companies with a turnover of less than £10.2 million, a balance sheet of less than £5.1 million or 50 employees or less.
IR35 Checklist
1. Status & Status Determination
Dealing with existing Relevant Contractors:
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Identify all Relevant Contractors (including those who work for you indirectly, for example through an employment agency) and assess their status.
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Status can be assessed using HMRC's Check Employment Status for Tax (CEST) tool (for an overview of the issues with CEST see here) or using a bespoke questionnaire tailored for your business.
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Issue Status Determination Statements (SDS) to all Relevant Contractors.
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Prepare a status disputes policy and communicate this to your off-payroll workforce.
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Deal with any status disputes arising from the issue of SDSs.
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Put a repeatable process in place for the future by determining a system for regular status reviews, especially following any 'material changes' to working arrangements (remember, IR35 is not a one-off exercise but an ongoing compliance requirement).
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Implement systems to ensure that any SDSs are passed down the 'contractual chain' and to the Relevant Contractor.
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Implement a system for new engagements of Relevant Contractors.
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Decide who will be responsible for determining status and when/how regularly status will be determined.
2. Payroll
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Identify for each of the Relevant Contractors who is responsible for the deduction of PAYE (this is usually the entity nearest the Relevant Contractor's intermediary, but this can change depending on the nature of the 'contractual chain'), if 'employed' status is determined.
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Ensure your payroll is sufficiently resourced and briefed to effectively implement the IR35 changes.
3. Commercial Contracts
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Review all customer contracts, especially those where Relevant Contractors are involved in the delivery, to ensure sufficient IR35 protections are in place.
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Review all supplier contracts, especially those where Relevant Contractors are involved in the delivery, to ensure sufficient IR35 protections are in place.
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If Relevant Contractors are moving to an 'umbrella company', you need to ensure sufficient tax and employment law protections exist in your contracts with the umbrella company.
4. Contractor Agreements
Dealing with existing Relevant Contractors:
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Obtain copies of and review contracts with Relevant Contractors.
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Update precedent agreements to be used for future off-payroll workers.
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Review all employment agency/employment business contracts.
5. Employment and Pensions
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Status determination – considering what the Relevant Contractor's status means from an employment law perspective – for example, are they now entitled to holiday pay, sick pay and pension contributions?
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Agree strategy on communicating with your Relevant Contractors.
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Ensure you are prepared to issue or amend contracts of employment to reflect status determinations.
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Prepare for termination and reengagement of individuals (on payroll) as appropriate, including pension considerations.
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Consider international and global mobility schemes.
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Think about your recruitment strategy for the future (direct engagement, via agencies etc.)
6. Communication
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Develop and implement a communications strategy for engaging with Relevant Contractors and future off-payroll workers as regards IR35 compliance from an employment law and tax perspective.
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Consider investing in training staff and managers on IR35 compliance from an employment law and tax perspective.
7. Compliance safeguards
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Review record keeping processes in the event of a HMRC audit.
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Review insurance policies (professional indemnity insurance, public liability insurance etc.).
Next Steps
IR35 comes into force on 6 April 2021, so businesses need to start preparing now, if they have not already.
Those who prepared in advance of the postponed April 2020 deadline also need to check their arrangements remain valid (see our guidance on the long-term validity of status determinations).
It is likely that after IR35 is implemented, there will soon be case law that will help clarify some of the greyer areas of the legislation – such as, who qualifies as an 'end user', for example.
In the meantime, it is better to take advice now, rather than be caught out by HMRC.
Want to know more?
Get in touch – we can help you develop a strategy to deal with the implications of IR35 effectively and efficiently.
For more information, please contact our IR35 team: Ranjit Dhindsa, Head of Employment, Pensions, Immigration and Compliance; Matthew Sharp, senior tax associate; and Christopher Kientzler, contentious tax barrister.
