Failing to deal with contractors correctly can expose your business to unexpected PAYE and NIC costs, interest and penalties. Our two tools can help you track and manage your off-payroll labour risk.
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The new IR35 rules have been implemented from 6 April 2021 and all public sector businesses and medium or large-sized private businesses are now responsible for deciding the employment status of their workers. This includes some charities and third sector organisations.
Our IR35 hub contains all the guidance you need to understand the changes.
There will be some out there reading this who are sitting comfortably knowing they have everything in hand.
However, the last 12 months have not exactly been plain sailing for businesses. For many there has been a need to focus on other matters and it is possible you may find yourself on the back foot. If you are one of this number, read on.
Am I too late?
No, you are never too late to work to ensure your business becomes compliant. However, we would advise some urgency. The new rules apply to all payments to contractors from April 2021, not just new contracts from this date. The longer you leave it, the larger the potential problem.
I heard that HMRC plan to take a ‘light touch’?
HMRC have stated that businesses will not have to pay penalties for any inaccuracies in the first 12 months relating to the off-payroll working rules, regardless of when the inaccuracies are identified, unless there is evidence of deliberate non-compliance.
They have also committed that they will not use information acquired as a result of the changes to the rules to open a new enquiry into returns for tax years before 2021/22 unless there is a reason to suspect fraud or criminal behaviour.
However, it is important to note that whilst there is a light touch on penalties, you will still remain liable for the PAYE, NIC and interest charges due.
Where do I start?
- Familiarise yourself with the rules and whether they apply to you. For example, don’t just assume that you will fall within the small company exemption without considering the status of your associates first.
- Identify all off-payroll workers that you engage. This has been a challenging process for many businesses. BDO’s Off-Payroll Risk Manager tool can help support you by identifying contractors from your purchase ledger and sorting them into groups including personal service companies, self-employed contractors and agency workers, so identifying the high-risk cases for individual review.
- Assess each worker’s status on an individual basis. You must take reasonable care and HMRC will not accept blanket decisions irrespective of contractual terms and actual working arrangements. HMRC’s CEST Tool could be helpful here and they will stand by the result produced by the tool, provided the information inputted is accurate. However, you will need to be cautious of the fine nuances in input which significantly impact the outcome. Also this tool does not take into account all of the employment status tests developed in Case Law over the years.
- Prepare and provide a Status Determination Statement (SDS) to the worker/organisation you have a contract with if you are the end user. This must include details of the employment status decision reached and your reasons for this conclusion.
- Retain detailed records of determinations and your reasons for these conclusions.
- Create an appeals process. The worker has a right of appeal and it is up to you, not HMRC, to manage the appeals process. BDO’s Off-Payroll Tracker will help you decide when an individual contract will fall within the new rules (requiring an SDS) or whether it will fall under the agency rules. It will also help you to record details of every contract and will document the formal SDS you issue, as well as track the appeals procedure where this is a dispute.
- Evidence that you have taken reasonable care. Using our Off-Payroll Tracker will provide a clear audit trail (exportable to Excel) to prove to HMRC that reasonable care has been taken with regards to engager responsibilities as well as demonstrating good employer compliance processes as part of wider SAO/CCO obligations.
- Correct any mistakes as soon as possible. HMRC have stated that they will consider your underlying behaviours when considering whether penalties are due and will determine the next steps in their approach. We are anticipating robust risk assessment activity so demonstrating reasonable care and exhibiting the right behaviours is important.
- Beware tax avoidance schemes. Some workers are being tempted to engage via artificial, contrived arrangements resulting in businesses paying less tax than otherwise might be the case. This could include loan arrangements, offshore suppliers and potentially some umbrella companies. Our advice would be for you to ensure you fully understand the entire contractual chain between your business and the worker, including ensuring the correct tax/NIC is being applied on payments to the workers. Due diligence is key and if you have any concerns, seek advice.
- Educate your business. Engaging off-payroll labour is often the domain of business managers rather than HR or Finance. It is important that all hiring managers know and understand the rules and your internal processes. Whilst it may appear cheaper to engage workers off-payroll, the new rules mean a bigger risk and ultimately a higher cost if they get it wrong.
The 10-point plan outlined above provides some overarching guidance. However, we would recommend seeking bespoke and detailed advice from your usual BDO employment tax contact on the relevant steps to keep your business compliant.