Many companies in a multitude of industries rely on off-payroll workforces. Using contractors benefits businesses when they require flexibility and agility, especially during times when it doesn’t always make sense to take on additional full-time employees. Perhaps you need to quickly bring in temporary resources when it gets busy, or you need a specific skill set for a certain business challenge or project. It’s a growing trend, but worryingly, changes to off-payroll tax rules have already caused widespread chaos for contractors and their employees across the public sector, and are now affecting the private sector, too.
How will IR35 impact companies and contractors?
Figures from the Office for National Statistics show that the number of self-employed workers in the UK has been on the rise since 2001. Today, they account for approximately 15% of the country’s working population and rising.
Yet in 2017, the government targeted this segment by overhauling how contract workers for public sector firms are taxed, threatening incomes and increasing the tax burden for HR departments, recruitment agencies and contractors.
Organisations from the NHS to the BBC have already been hugely affected by the IR35 reforms, which shifts the liability for defining a worker as ‘employed’ or ‘self-employed’ from the contractor to the employer. The government’s aim is to crack down on so-called “disguised employment,” where contractors work through their own limited companies or umbrella organisations for a company, but operate in the same way as employees and therefore pay less tax.
Blanket IR35 determinations
However, the repercussions have been far more serious. Concerned about getting the rules wrong, many organisations have decided to automatically class contractors as falling inside IR35, making them pay more tax, while others have pressured contractors to become permanent employees or lay them off. The likes of HSBC, Morgan Stanley and M&G Investments have released statements confirming that they won't be engaging contractors after September 2019, while RBS is decidedly still on the fence.
Now these IR35 rules are being extended to the private sector, coming into effect from April 2020. Large and medium-sized organisations including media firms, employment agencies, consultancies, building firms, hospitality businesses, engineering firms, training providers, and financial businesses could all be affected.
Some companies have already taken steps to prepare themselves for the imminent changes, and with good reason. If they fall foul of the rules, they will be liable for paying back taxes and fines amounting to tens if not hundreds of thousands of pounds. Although firms like HSBC have taken more drastic measures, there are other options that don’t involve inadvertently losing highly skilled contractors to competitors.
How to check whether a contractor falls inside or outside IR35
First and foremost, companies should try to familiarise themselves with the new IR35 rules and study all existing contracts. Conduct a full review of all staff, as well as the contractors currently working with you, with the aim of identifying who the new rules will affect.
When looking at the employment status of each worker you will need to consider:
- What are that worker’s responsibilities?
- Who does that individual answer to? Namely, does your company stipulate when, where and how they work?
- How is that worker paid?
There are tools like HMRC’s Check Employment Status for Tax (CEST), designed to help businesses decide if a worker falls inside or outside the scope of IR35. However, the government has openly admitted that CEST is flawed and experts have called for it to be reviewed. If in doubt, seek professional advice.
It’s very important to get this right. If you incorrectly class a contractor as falling outside IR35, but they are found to be an employee for tax purposes, your company will be fully liable for tax back payments as well as fines for late payment. At the same time, companies that incorrectly classify contractors as inside IR35 when their working arrangements genuinely fall outside IR35 will find themselves paying unnecessary employers’ national insurance contributions.
Steps you can take to protect your business
No matter how careful you are when trying to follow the rules, mistakes can happen. The good news is that companies and contractors can insure themselves against the risk of HMRC fines and litigation if they are found to be non-compliant.
IR35 Tax Investigation and Liabilities Insurance covers the cost of professional representation for both the defence and pursuit of HMRC enquiries as well as any back taxes, interest and penalties applied by HMRC following the conclusion of their investigation. For more information on IR35 insurance, read this article.
You can also read up about the different contract review options on offer, and what is most fitting for your business circumstances, here.
What to do in the event of an HMRC IR35 investigation
Though the chances of being investigated by HMRC are slim, don’t rely on this. HMRC can open an enquiry at any time, with no reason, and they regularly carry out random checks.
If you find yourself the subject of an HMRC investigation, don’t panic. HMRC conducts hundreds of IR35 tax investigations a year and many result in no action. High-profile cases such as those of TV personalities Lorraine Kelly and Kaye Adams demonstrate that HMRC can be proven wrong. But others like BBC presenter Christa Ackroyd haven’t been so lucky. Now the presenter is appealing the decision, which if unsuccessful could find the BBC liable.
What’s more, it isn’t usually a good idea to try and manage an IR35 investigation yourself. Contact professionals who are experienced in dealing with IR35 cases such as your business accountants and, if you have cover in place, your tax enquiry investigation insurance provider. Ensure all worker contracts, arrangement forms and communication with contractors is up-to-date and accessible. Importantly, remain prepared and organised.
Additional IR35 notes for businesses
Your business might not necessarily need to change the way it uses off-payroll workers, but will need to undertake a risk assessment to determine how IR35 changes may affect your organisation — and now is the time to do it.
Speak to Larsen Howie today to understand your IR35 insurance needs, and find out more about how to protect your business in case of an IR35 investigation. Our Head of Tax, ex-HMRC IR35 veteran Andy Vessey ATT, offers IR35 consultation, training sessions and general guidance as to how you deal with the legislation as a business. You can also read the latest IR35 updates in our Knowledge Hub.