Your not-for-profit organisation is about to see a big change in how you pay independent contractors and freelancers when it comes to 'IR35'.
Are you ready?
From 7 April 2017 responsibility for deciding whether IR35 (the off-payroll rules or the intermediaries legislation) is moving from the contractor to the client.
This change does not apply to end clients who are commercial organisations.
What is IR35?
The purpose of IR35 is to make sure that deductions equivalent to tax and National Insurance Contributions (NICs) are withheld when paying the invoices for services provided by contractors.
This puts the contractor in the equivalent situation as an employee on PAYE. They are no longer able to trade through the year and sort out their tax liability at the year end.
For not-for-profit organisations, the responsibility is moving to you.
This means the penalties for non-payment of tax are also moving to you. They can be substantial involving tax and interest as well as penalty fines.
What do you need to do?
- Check if your organisation is covered. You can find out here. It is the same list as those covered by the Freedom of Information Act
- Identify who is invoicing you for services and check if they are potentially covered
- Analyse the contract to see if you should be deducting tax under IR35. You can use HMRC's checker.
- Keep a record of the data you gave them and the answer you got. If the data does not match reality this will not avoid tax penalties later.
- IF IR35 should be deducted, identify if expenses are paid. Decide whether IR 35 will apply to whole invoices or just 'fees'.
- Notify your contractor and your payroll department/processor. Make sure this information is included in your Real Time Information (RTI) reporting for PAYE
- Pay your contractor's invoices less the specified withholding amount.
If your contractor disagrees with your assessment they can claim the money back from HMRC.
What could go wrong?
- Don't assume you are not covered. We have calculated that more than 80% of our not-for-profit clients will be covered.
- Don't leave it too late to identify your suppliers. You will need data from them.
- Many suppliers have no written terms of business or contracts, or use ones that are seriously out of date. Assessing out of date terms may lead you to false conclusions.
- Faulty interpretation of the questions or answers can lead to a wrong conclusion. We see this all the time on data protection registration self-assessments. If you are not used to answering questions on employment status this could easily happen to you with IR35.
- Don't lose the records of what you did. HRMC can go back 7 years. You will need to be able to lay your hands on these easily.
- The assessment needs redoing when the contract changes (even if the paperwork doesn't). It is not a one time process.
- Your supplier may be unwilling or unable to tolerate a 25% deduction from their invoice payments.
- This may lead to price increases or supplier changes or even bankruptcy if they are already being paid very slowly.
- If you are already struggling with PAYE this may overwhelm you. You may need to outsource this to someone who knows about PAYE AND IR35. This may involve you in additional costs.
Do you want to help to sort this out?
From assessing your contracts, training your team, or setting up systems that don't drown you in paperwork, our experienced team have spent the last 10 years helping managing and contract your outsourced teams.
A discreet chat avoids trouble