If you run your own business, or you’re a contractor or accountant in the UK, then you’ll probably know about off-payroll working, also known as IR35. The IR35 legislation has been in place since 2000 and already impacts the public sector, but new changes are coming into effect on 6 April 2021 that could impact you.
From this April, the legislation will be extended to medium and large businesses in the private sector – allowing HMRC to collect tax when a contractor is an employee in all but name.
If IR35 impacts you, the good news is that we’ve made updates to Xero Payroll to help seamlessly account for these changes.
The latest change to off-payroll legislation
The new IR35 legislation means that businesses will now determine whether the contractors they engage should be taxed in the same way as employees. Previously, this was determined by the contractors themselves.
This comes into effect from 6 April. However, HMRC recently announced a ‘soft landing’ period for this new legislation. This means they won’t charge any penalties for the first 12 months, unless there’s evidence of deliberate non-compliance.
What does this mean for you?
The first step is to work out if the latest changes impact you as a business or contractor. If you’re a contractor, it’s important to be proactive. You’ll need to discuss each contract and how your business will fulfill these with your clients, mutually understanding whether you fall inside or outside of IR35.
If you’re a business that engages contractors, you’ll need to carry out an audit of your current contractors to see where they fall. Once their position is established, make sure you communicate openly with them to avoid confusion, ensuring you provide them with a determination statement.
You can use the government’s Employment Status for Tax Service to help you determine if IR35 is relevant to you or any of your employees.
How to account for off-payroll working in Xero Payroll
Using Xero Payroll can make processing these changes much easier – saving you time and reducing errors.
We’ve just launched a new feature in Xero Payroll to help you get on top of the changes and process off-payroll workers with ease. It helps you to quickly and easily onboard off-payroll workers and process their invoices to ensure they’re taxed in line with PAYE regulations and IR35 guidelines.
Xero Payroll also sends the required reporting via RTI filings, for simplified compliance with IR35 legislation.
Once you’ve identified which workers fall into the off-payroll category, you’ll need to follow a few steps to set them up in Xero Payroll. This Xero Central article explains how to:
- Set up an off-payroll worker so you can pay them through Xero Payroll and file with HMRC
- Add payment details and unique pay items to an off-payroll worker’s pay template
- Use timesheets in Xero Me to streamline payment if your contractor tracks hours
- End an off-payroll worker’s contract