From 6 April 2020, most private sector companies that engage limited company contractors, whether directly or via an agency, become responsible for determining the tax status (known as ‘IR35’) of those assignments. Preparing for IR35 is a major exercise for businesses with large numbers of contractors and therefore, careful planning is essential for mitigating the resulting costs, risks and disruption.
However, many organisations have faced barriers in addressing the issue and have struggled with achieving a state of ‘readiness’. This is largely due to a lack of project ownership and centralisation, insufficient knowledge of IR35, the changes, impact and commercial implications.
What we can be sure of is that contract hiring is not dead. Particularly in light of the chaos and uncertainty surrounding COVID-19. Never has leaning on a flexible workforce been more needed than in the landscape of today. Irespective of the IR35 reform, there is no reason why organisations cannot continue to utilise contract workers assuming that the supply chain is engaged, the contract is solid and the employment status assessment has been conducted correctly.
1. IR35 legislation has been in place since 2000
IR35 is nothing new. In fact it’s been a piece of tax legislation since 2000. However, it was heavily criticised for being poorly conceived, badly implemented and was considered to be an unnecessary money-drain for some small businesses. Historically, 80% of IR35 cases brought before HMRC were unsuccessful. Therefore, one of the key objectives of reforming the legislation is to increase revenue from related cases.
2. The financial impact of IR35 on contractors will be significant
Like it or not, IR35 is coming rapidly down the tracks. And the reality for many limited company contractors is a significant reduction in ‘take-home’ pay. In fact, it can reduce the worker’s net income by up to 25%, costing the limited company contractor thousands of pounds in additional income tax and NICs.
3. The IR35 public sector roll-out in 2017 generated an extra £550 million in revenue
Feeling a little like deja vu? IR35 was initially rolled out to the public sector in 2017 and has since resulted in an additional £550 million in revenue. It was deemed by HMRC as a ‘great success’ and is, therefore, something they wish to capitalise on further following the private sector rollout.
4. Not all private sector businesses will be affected by the change
Whilst a HUGE proportion of UK businesses will be affected by the reform, the legislation will not apply to the smallest 1.5 million companies. Large and medium firms will need to decide whether the IR35 rules apply to their workers who are contracting through their own limited companies.
5. HMRC have introduced their own model for employers to determine the employment status of their workers
To help businesses with preparing for IR35, HMRC has devised a tool known as CEST (Check for Employment Status for Tax) for employers to determine the status of their contract workers. And, whilst seen as flawed by many experts, the tool does help organisations assess a contractor’s tax status for relatively straight-forward cases. The five key areas used to help determine employment status are:
- Personal service/substitution
- Supervision and control
- Mutual obligation of work
- Financial risk
- Part and parcel
6. The end-client (employer) or agency will be responsible for determining the worker’s tax status
One of the biggest changes brought about by the IR35 reform is the shift in responsibility for making IR35 status assessments. The decision now lies with the end-client or agency where as it previously sat with whoever is paying the contractor. Going forward, liability will sit with the end-client until they use ‘reasonable care’ to assess the contractor’s role and issue a Status Determination Statement (SDS). This SDS must then be presented, with reasoning, to both the ‘party’ the worker is contracting with (Agency) and the worker themselves.
7. A worker’s SDS could be disputed
Even if a full assessment has been made in relation to a contractor’s employment status, the contractor can dispute it (particularly if the contractor’s working practices change). On these occasions, it is necessary to follow a status disagreement process whereby a response is granted in 45 days from the dispute being logged.
8. Several high-profile firms have already committed to ban PSC contractors in their organisations
In some cases, big brands such as Barclays, HSBC, Sainsburys and Vodafone, have banned the use of PSC contractors within their organisations. However, this blanket ban approach isn’t necessarily reflective of the wider market. And, consequences of adopting this radical approach is likely to have huge implications for the UK economy.
9. Blanket-bans will restrict your talent pools
The general consensus is to avoid blanket bans of PSC contractors and to look at instances on a case by case basis. One of the key drawbacks of a blanket ban, in addition to the potential impact on the economy, is down to the restrictions you’re placing on your talent pools.
The reality is that if a contractor falls inside of IR35, there is no ‘win/win’ option for the worker and client. Costs are going to increase for the client and/or reduce the contractor’s take-home pay. So, if you want to retain and attract certain talent, it’s sensible to have a number of options available. Some of these might include a ‘cost splitting model’, or utilising umbrella providers, PAYE or SOW solutions.
10. The new ‘IR35 landscape’ provides a necessary opportunity for employers to tighten up their supply chains
Whilst any change in legislation can be a drain on company resources (from both a time and cash perspective), it’s important to try and seek out the opportunity… Preparing for the IR35 reform does provide an opportunity to get your whole supply chain in order. This is crucial given the criminal, financial and reputational risks associated with each stage of the supply chain process. From business leaders, HR, line managers, agencies, bill payers, to the contractor themselves; it’s important that everyone is on the same page and understands the details.
The Off-Payroll Rules in the Private Sector – March Update
Following the Budget announcement on 11th March 2020, ARM have prepared some slides that detail the top-level facts around IR35 and highlight some of the key areas that require our attention and due diligence.
Hopefully this summary and ARM’s guidance has helped answer some of your IR35 related questions. However, if you want to explore any of these areas in more detail we’d be very happy to have a chat.
Additionally, if you’re looking to hire HR contractors and you’re unsure of your options post-April then please do get in touch. I’d be delighted to talk you through our IR35 compliant offering and assist you with sourcing talent using a PAYE, umbrella or FTC approach – contact me at firstname.lastname@example.org or 0207 11 88 444
Blog updated: 17th March 2020 following an update from ARM
Blog originally posted: 30th January 2020