This week’s rollout of reforms to the tax rules on off-payroll working (known as IR35) will have a significant impact on the way many logistics firms employ contractors. In today’s article, we break down the essential information you need to know about the changes: why they are happening, what they mean, who they affect, and what to do next.
Why the reforms are taking place
The growth of the gig economy has seen a rise in the number of contractors utilised by private and public sector clients as a flexible temporary workforce. When dealing with contractors, many client organisations prefer hiring companies rather than sole traders. Historically, this has helped the client organisations to avoid liability for costly employment benefits.
In response, many contractors have established personal service companies (PSCs), which act as an intermediary for tax purposes. This makes the contractor more attractive to clients (indeed, it may be the only way to do business in some cases). It can also lower the rate at which earnings are taxed.
The government has decided to clamp down on this practice. HMRC feels that many contractors are, in essence, employees, and should be taxed as such, estimating the tax shortfall due to the practice to stand at £1.3bn a year by 2023-24. The changes were originally due to begin in 2020, but were pushed back until this year due to the COVID crisis.
What the reforms mean
The changes are designed to address this shortfall by shifting the responsibility for deciding the IR35 status of contractors to the client organisation. The government offers a number of tools to assist organisations in making this determination, as well as guidance on the changes: see the weblinks below for details.
In summary, organisations need to review the employment status of every contractor supplying services through a PSC on an individual basis and determine whether that person would be considered an employee if there were no PSC to act as intermediary.
If the answer is yes, the organisation needs to inform the PSC and individual in writing. Responsibility for operation of the contractor’s PAYE will then fall to the client or an outside agency.
These changes have several knock-on effects on the way companies do business. Alongside re-examining and potentially amending existing contracts, client organisations also need to put processes in place to ensure future hiring meets the legal requirements. This includes establishing a procedure to deal with disagreements. According to an article for peoplemanagement.co.uk, clients also need to consider training for those responsible for compliance, as well as examining the way they do business with agencies.
Who is affected
Medium to large companies across all sectors of the economy, including logistics. Accountancy and advisory firm Macintyre Hudson predicts that ‘the new rules will have a significant impact on the engagement of drivers and warehouse workers where these are supplied through intermediaries’.
Whether your organisation counts as a small, medium or large company is determined by your status under the Companies Act 2006.
What to do next
Follow the links to find government guidance on what your next steps should be. It is important to bear in mind that the new rules are designed to prevent a one-size-fits-all approach to deciding who in your employ falls under IR35. Failing to assess contractors on an individual basis could be a costly mistake, as HMRC have shown they are willing to pursue organisations making what it sees as bad faith assessments.
But issuing a blanket ban on the hiring of contractors—as some organisations have done in the run up to the reforms—may prove costly, too, with IR35 experts predicting those companies who follow a strategy of compliance will gain a significant advantage over those following a strategy of avoidance.