Rethinking workforce planning – IR35 rules await businesses in 2021

21 August 2020

As the furlough scheme winds down and employers have to resuming paying a larger element of furloughed worker’s wages, most UK businesses will be taking a cold, hard look at their staffing needs. Some will be making workers redundant or scaling back their hours: others will be overhauling their whole business model and possibly switching employees to zero-hours contracts or other flexible arrangements to suit the post-lockdown economy.

What are the risks?

Aside from the risks of getting redundancy arrangements right and the employment law issues around changes to contractual entitlements, opting for a more ‘flexible’ workforce brings in all the concerns around using off-payroll labour. The IR35 rules for private sector businesses were postponed for 12 months to help business deal with COVID-19 but they will soon be in place and businesses need to address the risks that they bring.

Off-payroll rules for Private Sector from April 2021

The new rules will require the private sector organisation to assess if the intermediaries rules (IR35) apply to the contracts it enters into with any Personal Service Companies (PSCs) that are hired directly or via third parties. Although the new rule does not take effect until 6 April 2021, any contract that engages a worker straddling that date will be affected.

Where the engager determines that 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. 

For businesses already using a lot of contractors, these changes could result in an increase to the operating costs of businesses either directly because they are the fee payer or indirectly as organisations lower down the supply chain seek to increase their charges to offset their increased in their tax and NIC obligations. For businesses rethinking their staffing model, the costs of using contractors may not increase (compared to employees) but the administrative requirements will be more demanding. And failing to deal with contractors correctly can expose a business to unexpected PAYE and NIC costs, interest and penalties (higher penalties if it can’t demonstrate that it has taken reasonable care to get things right).

BDO tools to support clients

As well as our employment tax consulting services, BDO has developed two software based solutions to help organisations manage the switch to the new rules.

Off-payroll Risk Manager

Working from a client’s purchase ledger entries, BDO’s Off-payroll Risk Manager can help then easily identify their contractors and pick out the high risk cases for individual review. The tool will then break the contractors down into groups including personal service companies, self-employed contractors and agency workers – allowing clients to manage down the risk to their business without having to spend huge amounts of time reviewing individual purchase orders from your supplier population.

BDO’s Off-payroll Risk Manager builds a bespoke risk register that not only allows clients to focus resources where they are most needed but demonstrates to HMRC that the business is actively managing the off-payroll issue.

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Off-payroll Tracker

BDO’s Off-Payroll Tracker will help clients decide when an individual contract will falls within the new rules (requiring a status determination to be made) or whether it will fall under the agency rules. It will also help them record details of every contract and document any formal status determinations that are made as well as track the appeal process where a contractor disputes the decision. This gives clients a clear audit trail to prove to HMRC that they have taken reasonable care over their responsibilities as engager or end user for each worker.

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Read our IR35 hub for further guidance.