From 6 April 2021, off-payroll working rules (commonly known as IR35) will be reformed. This change impacts around 60,000 engager organisations, predominantly medium and large-sized businesses, outside the public sector that engage with individuals operating through structures such as personal service companies (PSCs).
These changes were originally due to come in from 6 April 2020 but a deferral was announced to 6 April 2021 in response to the spread of coronavirus, to help businesses and individuals.
The impact of these changes for medium and large businesses or anyone who operates off-payroll through an intermediary, such as a PSC, should not be underestimated. Preparation will be crucial.
How will this proposed change impact end users of these services in the private sector?
The reform will mean that medium and large businesses in the private sector (excluding those that are 'wholly overseas') who are end-users of off-payroll workers who operate via intermediaries, such as PSC’s will face additional and often substantial one-off and ongoing challenges and costs.
Initially, it will be necessary to identify existing arrangements that will be caught by the legislation, that are expected to be ongoing after 5 April 2021, and determine the additional cost that may arise as a consequence. For example, for businesses which decide that their off-payroll workers fall within the IR35 rules, from April 2021 there will be increases to direct costs, such as employer’s NIC (currently 13.8 per cent) and potentially the Apprenticeship Levy, where applicable (0.5 per cent).
Processes and potentially additional resource will need to be put in place to assess engagements and provide a statutory status determination statement (SDS) to the worker and any third party, for example a recruitment agency, setting out the reasons for reaching that determination.
End users will be required to provide to a person who made the request (likely to be a contractor or fee payer) a statement as to whether in their opinion they qualify as small for the tax year specified in the request generally within 45 days of receipt.
End users of the services will be required to set up a status disagreement process and respond to representations made by off-payroll workers or the fee payer within 45 days of receipt.
System changes will also be required to help meet IR35 compliance and PAYE/NIC withholding obligations going forward.
What should businesses be doing now?
For those businesses which had already made changes to reflect the original intended start date of the proposed new rules, HMRC has said that Status Determination Statements (SDS) already made will have no standing in law and will not be used as evidence in any enquiry dispute during the coming year. However, contractors could still face investigation under the current law as they have since the existing rules were introduced in 2000.
Those medium and large businesses in the private sector who were less prepared for the original intended start date should not underestimate the amount of work required to be sufficiently prepared for the change.
As a starting point we would suggest that businesses should:
- assess the number of workers being used (who are expected to continue beyond 5 April 2021) who operate via ‘off-payroll’ arrangements, such as PSCs, who could potentially be caught by these rules. Remember that this should include workers operating through PSCs sourced via intermediaries, such as recruitment agencies, as well
as those engaged directly;
- undertake due diligence on their worker supply chain as transfer of debt provisions will apply, under the new legislation transferring PAYE and NICs liabilities where there has been non-compliance in the labour supply chain;
- assess the direct and indirect financial impact of the proposed change. For example, new processes and systems will be required to determine if the rules apply to an arrangement and to manage status disputes. Where arrangements are caught, the fee payer will need to account for and pay the related tax and NIC, including the additional cost of employer NIC; and
- be particularly mindful of the potential additional costs when entering into new arrangements or when renewing existing contracts with workers now that will continue beyond April 2021.
How can RSM help?
Our specialists have a detailed knowledge of the proposed rules and practical experience of implementing the changes.
We have a multi-disciplinary team of experts who can provide advice and help you prepare for all aspects of the
proposed changes, including:
- designing new processes and controls, such as payroll, human resources, finance, data management and IT;
- workshops and bespoke training;
- developing a tailored approach to status determinations and employment status for your business; and
- changes to your budgeting, compliance, contracts and key stakeholder communications and employment law support through RSM Legal LLP.