Historically, when a business engages with a freelancer or contractor to work on a project over a long-term basis they do not appear on any payroll, instead they receive payment once an invoice is submitted. This freelancer or contractor though will often only be working exclusively for the one company.
Due to the recent changes with the off-payroll working rules (also known as the IR35 rules), there is a potential that this will need to change and the contractor will have to become an employee and paid via the company PAYE system.
The following provides a little more information on the IR35 changes and what they mean to self-employed contractors and businesses.
What changes does the IR35 rules bring?
A company (considered to be a medium or large company operating in the private sector) can now determine what a contractors IR35 status is. Obviously the company needs to consider this carefully as it will have a negative impact on a contractor. The contractor will have to become considered an “off-payroll worker”, and added to the payroll system, covering all requirements for tax and national insurance.
If the company is considered to be a small private organisation then no changes are needed and the contractor is in control of their own assessments and employment status.
Contractors need to remember:
- There is a stronger chance that you will now be considered as employed, impacting tax and national insurance contributions.
- If you have the choice, you get better tax benefits when being classed as self-employed.
What is a medium/large company?
Within the new IR35 legislation, it will clearly show the criteria that dictates a medium/large company. In essence it has to meet 2 or more of the following conditions:
- A turnover in excess of £10.2 million
- Employing more than 50 staff
- A balance sheet which is larger than £5.1 million
Any contractor working for this size of company will need to be made aware of these changes and the business will need to decide whether they fit in the scope of IR35 and become employed.
How do I deal with “off-payroll working”?
Obviously, with these changes there will be some significant paperwork and key steps a company will need to undertake (to commence at the start of 2021/22 tax year):
- A company must take the lead in determining IR35 responsibilities (the HMRC CEST tool can assist with this) and they must advise all contractors of the outcome (normally by issuing a status determination statement).
- As soon as a contractor is identified as being within the IR35 criteria they need to become an employee and be paid under the “off-payroll worker” classification. At this stage the company (or recruitment agency supplying the worker) will become responsible for deducting the income tax and national insurance contributions from the monthly payments.
If you have any questions in relation to IR35 and off-payroll working then the Stepping Stones team would be happy to help. Please call us on 01173 700 079 or e-mail firstname.lastname@example.org.