Despite significant opposition, British MPs have denied the UK a three-year delay to the impending changes of working rules commonly known as IR35. The proposed changes would have been introduced in April 2023, however, they will instead be brought into place in April 2021.

There are numerous effects that IR35 will have upon businesses operating within the UK. Perhaps most notably is the onus of responsibility for assigning tax status of contractors hired by larger businesses now falling upon the employer.

What Is IR35

In 2000, HMRC brought in the IR35 rules to tackle the ‘deemed employment’ issue, where contractors did not identify themselves as self-employed and instead used an intermediary or other titles to avoid certain taxation. The original rules, as they were introduced, received backlash and have since then been amended with planned changes to be introduced in April 2020. However, due to the COVID-19 outbreak, this was postponed until 2021. Despite extensive revision, IR35 continues to draw criticism, notably for its disempowerment of small and individually-managed businesses that could be reclassified as employees.

Under IR35, there will be great scrutiny placed upon the distinction of employee contracts. A business or agency hiring a contractor or freelance worker will take on significant financial risk if they do not properly adhere to the appropriate employment classification with their worker. This will likely lead to a greater number of freelance workers and contractors to seek umbrella services as an alternative to forming their own limited company.

How to Defend Your Business

Firstly, it is important to see if IR35 affects your business. The government’s website has extensive information on its classifications, which are regularly updated, and currently states that medium-to-large-sized businesses will be affected. These guidelines also outline the businesses and employees that will be affected as the reform takes place next year. It is important to check this information as IR35 has a large reach and you may fall under its classification without realising it.

Secondly, consider your payroll department. Your HR and payroll departments should be reviewed regularly to ensure that it remains compliant to the most up-to-date HMRC and employees requirements. Alongside IR35, COVID-19 is also prompting significant changes to tax law as well as greater scrutiny upon businesses.

For extra security and to prevent being caught out, it is worth considering the benefits of payroll services. Outsourcing your payroll eliminates the risk involved with in-house payroll operations. Errors can occur with outdated software, non-compliance with HMRC, or human error. However, with external payroll services, these issues are avoided. External payroll groups are growing in popularity due to this security and, as such, they are becoming an affordable and common choice for many businesses who wish to appropriately hire contractors.

Continuing in-house payroll will require an intimate review of current contractor and employees, as well as their tax codes and payments. If you are a business hoping to circumvent IR35 and continue with contractors as they are, you will be out of luck and forced to declare them as employees, with agreed benefits, following April 2021.