What’s the latest with the IR35 off-payroll rules, and how to ensure your business is compliant

There’s been so much going on for businesses over the last few months across the economy, politics and society in general, that you’d be forgiven for falling a bit behind when it comes to keeping up with specific legislation… especially legislation which was mooted to be scrapped. 

That’s especially true of IR35, off-payroll working rules which govern how larger organisations should interact with contractors and their tax affairs. 

Established in April 2021, the move caused a lot of upheaval for self-employed service providers and businesses alike. 

What is IR35 and do you need to worry about it?

IR35, broadly speaking, was brought in to ensure that contractors working through their own limited companies but acting as an employee to their clients are no longer able to either purposefully or accidentally benefit from avoiding employed levels of tax and national insurance contributions. 

It also provided additional protections for contractors working within an umbrella company to offer their services, such as holiday and sick pay. 

It’s introduction created a bit of a scramble for businesses and contractors alike, and confusion as to who was responsible for working out when IR35 applied, if and how it applied, and what to do if it did. 

To work out whether IR35 applies to your business, your organisation needs to meet two of the following three criteria:

The now infamous mini budget of September 2022 (yes, it really was only four months ago, at the time of writing!) included an Easter egg for businesses which set out a plan to revoke IR35 rules by April this year. 

This, and additional announcements made tby then Chancellor Kwasi Kwarteng during that budget, was quickly scrapped though. The u-turn on IR35 has been u-turned, so employers need to continue meeting their obligations as it relates to existing IR35 rules. 

• An annual turnover of more than £10.2 million
• A balance sheet total of more than £5.1 million (total shown as assets before deducting liabilities)
• More than 50 employees]

It’s worth spending some time to work out whether or not your relationships with contracts should indeed sit within an IR35 framework, as non-compliance can result in a fine of up to £3,000 per contractor. 

How to remain compliant with IR35 rules

The first step is to establish whether the contracts you’re currently engaged with may fall within the IR35 guidelines. There’s a handy page on the government website to support  making this assessment, and you can also speak to the team here at Phase 3  for some additional guidance. 

If the rules don’t apply to your organisation, likely as you employ fewer than 50 people and have a turnover below £10 million, then the best bet is to keep abreast of any changes in case those IR35 rules tighten in the future. 

If you think that your organisation is of the right size and working with contractors in a way in which they could fall within IR35, then you need to take action sooner rather than later. 

This is a complicated and involved process, but some of the key steps include:

• Deciding the employment status of all contracted workers, whether they provide their services directly or through intermediaries (like limited company or umbrella firm) and communicate that decision to them.
• Ensure your contractors are paying the correct tax for the services they’re providing. If within the scope of an employment contract, your organisation will need to deduct income tax and NI from payments too.
• Record everything, including any disagreements.
• Factor IR35 issues into any future contracts with external resources.
• Ensure your payroll and financing software are capable of managing off-payroll calculations and invoices. If you’re not sure, speak to Phase 3 today about our system review and health check service.

Remember that HMRC has the power to backdate any payments it’s owed, so act now to avoid surprise bills and penalties in the future.