IR35, the ‘off-payroll working rules’, is a tax legislation designed to tackle avoidance. For small business owners and contractors, it’s crucial to have a comprehensive understanding of IR35 and its implications on payroll.
Failing to grasp the ins and outs of this UK regulation puts you at risk of being over-taxed and fined.
Here Simon Bradbury, Global Payroll Consultant and CEO at Global HRIS, shares why it’s so important to protect your business through IR35.
Let’s start with the basics: what is IR35?
IR35 (also known as off-payroll working) is a piece of UK tax legislation introduced by HMRC in 2000. It’s designed to close a loophole in the tax system where workers could pay less tax.
IR35 compliance can also help to protect the rights of workers and ensure that they receive the appropriate benefits and protections based on their employment status. This can include holiday pay, sick pay, and pension contributions.
The objective is to ensure that people are paying the right amount of tax.
Does off-working payroll apply to everyone?
Off-payroll working, also known as IR35, is applicable to public sector organisations, private sector businesses, and charities only if certain criteria are met. However, smaller businesses are exempt if they meet two of the following requirements for two consecutive years:
- Annual turnover of £2 million or less.
- Balance sheet total of £5.1 million or less.
- No more than 50 employees in the business.
Inside VS Outside IR35
Being inside or outside of IR35 refers to an individual’s employment status for tax purposes. If a worker is deemed to be inside IR35, it means that they are considered an employee for tax purposes and must pay tax and National Insurance contributions accordingly.
On the other hand, if they are deemed to be outside of IR35, they are considered self-employed and are responsible for managing their own tax affairs.
This determination is based on factors such as the worker’s contract terms, their level of control over their work, and their degree of integration into the business they are working for.
Can I Avoid IR35?
It is not possible to simply avoid IR35 by declaring yourself as self-employed or by operating through a limited company.
IR35 is a complex tax legislation that looks beyond the labels and requires a thorough examination of the worker’s actual working relationship with their client or employer. Any attempts to avoid or circumvent IR35 can result in penalties and legal consequences, so it’s essential to understand and comply with the regulations to avoid potential risks and financial losses.
Penalties for employers
There are strict rules if you don’t comply with the latest off-working payroll rules. You are at risk of a penalty issued by the HMRC below:
- A penalty of 30% of unpaid tax if the HMRC finds you careless about your employment status, but did not know it was inaccurate.
- A penalty of 70% of unpaid tax if HMRC finds that you knew you were within IR35 and didn’t comply.
- 100% of unpaid tax if HMRC finds that you have actively tried to conceal your IR35 status and underpay your tax.
Complying with IR35: A Checklist For Every Business
Decide the employment status of every worker
It is your responsibility to determine exactly whether your staff (including any contractors) will be either inside or outside of IR35 status.
The status should also be reviewed based on the contract between the end client and the contractor, as well as the working practices that they’re following.
Any recruitment companies must be compliant with off-working payroll, too. So, alongside reviewing all your staff contracts, you should run an audit of any recruitment firms.
Communicate any changes
Your team is at the heart of your business. Once you have defined whether an employee is within or outside IR35, communicate this clearly via a SDS. A status determination statement is prepared by a business that shows the employment status of every employee.
If you employ contractors – or you’re planning to – you must clearly communicate any IR35 changes. It will help them to understand that these new tax efficiency rules are something that is unavoidable.
Keep a trail
It’s important to document every process you have followed for any contractor in your workplace. This should include why IR35 does not apply, and the reasons for your decision. This documentation and paper trail will be useful for any disputes with HMRC.
Establish your recruitment process
As your business grows, you must be transparent about any advertised roles, specifically whether you are hiring for a contracted piece of work. Any prospective applicants should easily be able to see whether a role falls within or outside of IR35 rules.
Payroll compliance is a vital step for any business. Let our team support you with your payroll journey – find out more about Global HRIS today.
Author: by Global HRIS