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IR35: Your Step-By-Step Guide To Off-Payroll Working Rules

IR35 – also known as ‘off-payroll working rules’ – is an anti-avoidance tax legislation. As a small business owner or contractor, it’s more important than ever before to understand what IR35 is and how it relates to payroll. Without a clear understanding of the off-payroll working rules in the UK, you’re at risk of being over-taxed.

All public authorities have been responsible for deciding whether the IR35 rules apply since 2017 – and the private sector took on this responsibility in April 2021. In a few simple steps explained below, you’ll understand what off-payroll working means to your business. We’ve outlined what IR35 is, the off-payroll working rules in place, and how it could affect your HR teams.

Off-payroll working can be confusing, especially if you employ contractors. Our consultants are also up-to-date with the latest IR35 legislation and we will ensure your payroll is compliant, accurate and your team are paid on-time.

As a small consultancy, one of the key benefits of working with us is that we take on the responsibility for complying with IR35. This gives you the peace of mind that your company is in compliance with the law and removes your risk of penalties.

What is IR35 or ‘off-payroll working rules’?

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.

The objective is to ensure that people are paying the right amount of tax. Put simply, it aims to prevent disguised employees from using limited companies to avoid paying National Insurance contributions on their earnings. 

The IR35 rules are confusing – and leave many people unsure of the amount of tax they must pay.

Why was IR35 introduced? 

The legislation has been changing and adapting frequently, but the aim of off-working payroll is to tackle tax avoidance from:

  • Businesses that are designating their workers as contractors (disguised employees) to avoid paying employers NI 
  • Contractors that are really ‘disguised employees’
  • Any business that lists workers as ‘self-employed’ to avoid tax – when they are in full-time or part-time paid employment

When someone is a ‘disguised’ employee, they’re taking advantage of the tax efficiency of working through a limited company, but they should be classed as an employee. They are only placing themselves as a ‘disguised’ employee to avoid paying tax. 

2 employees working together on global payroll.

Does off-payroll working apply to everyone?

IR35 – or off-payroll working – applies to public sector organisations, private sector businesses and charities, but only if you meet the below criteria.

Smaller businesses are exempt, as long as you meet two of these points below – and for two consecutive years:

  • Annual turnover of no more than £2 million
  • You have a balance sheet of no more than £5.1 million
  • Your business has no more than 50 employees 

Inside IR35 vs. Outside IR35 

Being inside IR35 means your contract falls in the off-payroll working rules. To put it simply,  HMRC sees you as an employee for tax purposes. 

Being outside IR35 means your contract points towards self-employment, so you can operate tax efficiently. To be outside means you are operating as a genuine business – and operating outside of the IR35 rules. 

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.

From payroll project management services to payroll testing, we’ve got you covered. Contact our experts today to find out how we can support your business.

 

Author: Simon Bradbury, Global Payroll Consultant and CEO at Global HRIS

Last updated: 02/07/2023

Find out more about how we can help you by calling Global HRIS today on +44 161 317 2903 or get in touch through our website.
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