A Twitter poll has established that a concerning three-quarters of UK organisations are not ready for the IR35 reform, which is due to hit the private sector on 6th April 2020: just six months away.
This research - carried out by payroll software and HR solutions company MHR, who work with over 1,000 companies that could be affected by the legislation - highlights the concerning potential for rife blanket determinations come spring. However, despite financial sector corporates like Barclays, RBS, and HSBC beating a path for knee-jerk contractor culls, it’s certainly not the best way to respond to the changing legislation and far from an easy, risk-averse solution. (Un)surprisingly, preparing for the IR35 reform is key.
How is IR35 changing in April 2020?
The main change being made to IR35 – otherwise known as the ‘off-payroll rules’ - is a shift in liability. While it used to be the contractor’s responsibility to make the employment determination, as of April next year it’ll now be up to the fee-payer to make that decision, as well as calculate and pay any deemed income tax and NICs necessary.
The IR35 reform also introduces a new power that allows HMRC to collect any tax that goes unpaid by the fee-payer from other parties in the supply chain, which will apply to all contracts in the public sector and engagements with medium and large companies in the private sector from April 2020. For example, if the end-client (should they be the fee-payer) fails to make the correct income tax and NI deductions on behalf of a caught contractor, HMRC could demand that owed amount from the recruiter instead.
Lastly, while not a part of the IR35 legislation but certainly influenced by it, you should be aware of the Key Information Documents and what they mean for everyone in the supply chain. These documents will mean that recruiters have to supply key information about the business relationship between the contractor, agency, and end-client before a contract is signed.
If you’re not too familiar with the IR35 legislation as a whole, read our comprehensive guides to get up to speed.
How should I carry out IR35 status determinations for my business?
While CEST may be recommended by HMRC as the go-to tool for IR35 status determinations, it’s important to remember that there are other options available that are just as valid. After NHS Digital was billed £4.3m in October for incorrect status determinations, despite using CEST, it may be prudent for companies to use HMRC’s tool as an initial indicator only.
Neil Tonks, IR35 and tax legislation expert at MHR, warns: “IR35 represents a significant change in the way organisations in the private sector engage and pay their contractors. Preparing for the change is no easy task with the process estimated to take three to four weeks to complete, so companies mustn’t pay lip service to the new rules and treat IR35 assessments as an urgent priority to ensure they fully comply.”
“Failure to correctly assess contractors could lead to backdated demands for unpaid PAYE, tax and NICs, and fines for delays and late submissions,” Tonks continues. “That’s without mentioning reputational damage which could impact the ability to attract contractors and other temporary workforces, who provide invaluable flexible expertise.”
How do I prepare my business for the private sector IR35 reform?
Read on for Neil Tonks’ top HR tips to prepare to ensure you don’t fall foul of the new IR35 rules.
Carry out an audit of your contractors
The first step to getting IR35 ready is to conduct a full audit of all employees and contractors currently working within your business. This includes getting a clear understanding of how many contractors you use, which parts of the business use them, and how important their contribution is to the business.
Inside or outside IR35
Once you have audited your contractors, you need to determine if they fall inside or outside the new rules. Contractors should be assessed on a case by case basis; while it may be tempting to adopt a blanket ‘everyone is inside’ approach to save time and money, this can lead to serious repercussions. You can be heavily fined, as well as charged backdated tax and interest, for failing to demonstrate ‘reasonable care’ when making employment status decisions.
Create a clear communications plan
It’s important to be transparent when communicating with your contractors during their status assessment – after all, their income is in your hands. Once you have determined the employment status of your contractors, you should have an open conversation with them to provide reassurance and minimise any conflict and confusion.
Recent research found that four-fifths of contractors are more likely to work with a company that has proper IR35 policies and procedures in place. Being forthcoming about your IR35 process will ensure you continue to benefit from flexible, skilled workers and may even help you attract talent from competitors.
Introduce a new agreement policy
The employment status of your contractors will need to be clearly outlined in an agreement policy. You will more than likely need to formulate a new agreement policy for any new contractors you take on from April 2020, while existing contractors might need their agreements to be adjusted when they run into the new financial year. You will need to identify which part of the business is responsible for this, what level of knowledge exists in the business, and whether additional training and support are required.
Consider the true cost to your business
HR departments need to be aware that the cost of employing such workers could rise as a result of IR35. To compensate for their tax and NICs contributions being deducted at source should they be caught by IR35, many contractors may look to increase their daily or hourly rate. To help minimise the impact of any increase in fees, talk to your contractors impacted by the change at the earliest opportunity so any cost increase doesn’t come as a surprise and can be budgeted for.
Setup on your HR and payroll system
If your contractors operate through an agency, it is the agency’s responsibility to deduct the tax and pass that info on to HMRC. In this instance, the contractors would be on the agency payroll and not your own.
Other than that, contractors who fall inside IR35 will need to be set up on your payroll system - best practice is to group them on a dedicated payroll cycle. Not only will this simplify the process but helps with your data analytics. Contractors inside IR35 aren’t entitled to receive a payslip, but you are obliged to inform them how much tax and NI has been deducted.
How Larsen Howie can help you prepare for IR35
There’s an argument to opt for a ‘manual’ contract review over an automatically generated determination; after all, no matter how thorough the questionnaire, the nuances of certain arrangements could be missed. A contract or working practices review carried out by an IR35 specialist may take longer to receive your determination from, but the results will be far more reliable. You also have direct access to the specialist that carried out the review, meaning that you can ask any questions you may have about the results and how they may affect you.
Larsen Howie offers a range of contract and working practices reviews – find out which option would be best for you here. We also offer IR35 investigation insurance with representation from our Head of Tax, ex-Qdos IR35 specialist Andy Vessey ATT, should it go to tribunal.