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  • IR35 in the private sector
Article:

IR35 in the private sector

12 August 2020

We have a strong team of experienced IR35 experts who are already helping businesses like yours assess the impact of the new rules and prepare for their introduction in April 2021.

See BDO's Off-payroll labour tools

What companies are affected by IR35 in the private sector?  

The new rules are similar to those used for the IR35 Public Sector reforms in 2017 but go further in a number of respects (and these extensions will also apply to Public Sector businesses from April 2021). However, the private sector rules will only apply to medium and large businesses with the definition of an exempt small businesses being based largely on the Companies Act 2006 definition of a small company. Where requested by the worker (or the entity contracting with the end client), any entity must confirm within 45 days whether or not is it treated as ‘small’ under these rules – read more.

How will IR35 affect my business?

The changes will affect organisations that engage workers through Personal Service Companies (PSCs) or any other intermediary such as a partnership or LLP. This is because the new rules will require the engaging organisation (the engager) to assess if the intermediaries rules (IR35) apply to the contracts it enters into with any PSCs that are hired directly or via third parties.

Where the engager determines IR35 applies, the person or business paying the PSC (the fee payer) must apply PAYE and NIC deductions to the payment for the worker services. In other words, they must treat the worker as a deemed employee for tax purposes. In addition, the fee payer must also account for employers NIC and potentially the Apprenticeship Levy.  

These changes could result in an increase to the operating costs of your business either:

  • Directly as a result of being the fee payer
  • Indirectly - as those organisations lower down the supply chain seek to increase their charges to mitigate the potential increases in their tax and NIC obligations.

The Government's response to its implementation review confirmed that it would take a light touch approach to penalties for errors in the first year of the new rules. Nonetheless, businesses need to take their new obligations seriously to avoid putting themselves on HMRC's 'risk' list for future years.

How can you prepare for IR35 in the private sector?

With so many changes going on in all businesses it would be easy to lose sight of the reforms coming into force in April 2021. However, all businesses (particularly those changing their staffing models) should be considering the potential impact now so that they have time to manage their PAYE compliance effectively and efficiently. Any contractor engaged now whose contract runs until after 5 April 2021 may fall within the new rules so it is important to start preparing now to manage your risks.

As a starting point, it is important to establish the profile of your use of PSCs and, potentially, your wider non-payroll labour portfolio, both now and under any new business model you are adopting. Your key stakeholders will need to have a clear understanding of:

  • How many PSCs you use
  • Which parts of your business use them
  • How they are used 
  • How important they are to the different parts of the business.

This portfolio analysis will provide clarity to what commercial contracts are in place and if they remain fit for purpose. From our experience with helping organisations to date, it is often appropriate to introduce updated contracts that meet the needs of the organisation in the event IR35 will apply to a particular arrangement.

Once all PSC use is identified, processes must be put in place to guarantee that an IR35 assessment is completed before engaging with a worker supplied via a PSC. Clearly, it will be critical to identify which part of the business will be responsible for the IR35 review process, and to consider what level of knowledge there is in the business. You may need to train and support the relevant staff.

How we can help you?

You can rely on us to help you manage this complex issue compliantly and efficiently. We have extensive experience of both earlier IR35 reforms in the public sector and the wider PAYE and NIC compliance obligations of engaging non-payroll labour.

We will work with you and the key stakeholders in the business to identify what contracts may be at risk, assess both the potential financial and operational impact on your business and implement changes that will minimise the impact of the new rules. We can also help you build a robust compliance structure for the future.

I want support on IR35

BDO’s full guidance on extension of IR35 into the private sector

Our guidance

IR35 - Are you the client, fee payer or another entity in the chain?

IR35 – How does status determination pass down your supply chain?

What is a small company under IR35 rules?

Managing the risks of all non-payroll labour

Off-Payroll Labour on one page

Sector focus

Enquiries in the Healthcare sector

IR35 in the Financial Services sector

What NEDs need to know about IR35

Off-payroll rules and potential R&D relief

IR35 - Implications for the Oil and Gas Sector

Public sector rules up to 5 April 2021

HMRC and Government activity

CEST has been updated – but has it been improved?

Government publishes IR35 reform review

Existing public sector rules

Key information for public sector organisations