Is your payroll ready for the changes to IR35?

From April 2020, off-payroll working (IR35) legislation is changing, impacting payroll processes for large private employers, recruiters and contractors.

What is IR35?

HMRC defines the purpose of IR35 as, “making sure that workers, who would have been an employee if they were providing their services directly to the client, pay broadly the same tax and National Insurance contribution as employees.”

Broadly speaking this means that contractors who are relied on the same way as an employee will now have to pay the same NI contributions and Tax.

What exactly is IR35 going to change?

The changes to IR35 will require employers who utilise workers from a personal service company (PSC), or other similar arrangements to determine whether that worker is operating as an employee or supplier.

If the verdict is that the worker is acting as an employee than the organisation is required to deduct tax and National Insurance contributions from the payments made to the PSC.

What is the purpose of the IR35 changes?

As the responsibility of determining whether a worker is an employee previously fell on the contractor, HMRC predicts that less than 10% of PSCs complied.

Also, HMRC estimates that the annual tax cost could have been as much as £1.3bn by 2023/24.

Who will IR35 impact?

The changes apply to medium or large businesses who meet two or more of the following criteria:

• An annual turnover of more than £10.2 million
• A balance sheet total of more than £5.1 million
• Have more than 50 employees.

Following a review in January 2020, HMRC announced the IR35 changes will apply to services carried out from 6 April 2020 onwards.   

What do you need to do?

If the changes apply to your business, you must ensure that you have the necessary procedures in place to evaluate the position of every contract, updating workers on their status within 31 days.

Once you determine their status you will also need to notify the PSC within 31 days.

Workers who are now classified as employees will need to be processed through your payroll to allow for tax and National Insurance contributions.

It’s worth noting that off-payroll worker shouldn’t be included in AE schemes or have student loan deductions applied.

In a further concession, HMRC also stated that businesses will not receive penalties for errors relating to off-payroll working in the first year unless there has been deliberate non-compliance.

How will IR35 be assessed?

HMRC will conduct ‘test of employment’ procedures in accordance with UK employment law.

Rather than looking at the written contract between an individual and their client, an inspector will instead look at the nature of the working relationship.

The findings will then be presented to a judge who will give the final verdict on whether the IR35 rule applies.

How can IRIS help?

If you’re looking for a compliant solution, look no further than IRIS payroll software and our Managed Payroll service as all our products will allow for off-payroll workers to be processed.

Also, if you would like to learn more about IR35 and the other legislative changes coming into play in April 2020, take a look at our payroll year end training pack.

Our training pack is available with on-demand or live options, covering all the new payroll legislation for the 2020/21 tax year.

If you have any other queries, give our friendly payroll team a call on 0344 815 5656.