If you hire contractors, or if you provide services as a contractor, you’ll be familiar with IR35 and no doubt aware that changes to the regime scheduled to come into force last April were postponed until April 2021. The challenge now for businesses is to ensure you are IR35 compliant without incurring excessive costs, a lot of extra work, or risking litigation. So, how IR35 ready are you?
A quick recap of the provisions
Introduced in 2000, the purpose behind IR35 was to remove the tax advantages of providing services via a “personal service company” (PSC) whereby the contractor was in reality actually a ‘disguised employee’. At that stage, it was the contractor’s (or rather their PSC’s) responsibility to determine whether or not he or she fell within the IR35 provisions. That changed in 2017 when the Government extended the scope of the rules to include all public sector organisations, with the hiring organisation becoming responsible for determining the employment status of contractors.
From the 6th April 2021, the rules are being expanded again to include most private sector businesses. There is a “small business” exemption that provides that for contractors engaged by a small business (as defined by the Companies Act 2006) the current rules will continue to apply. If your organisation is small but is within a corporate group, the parent company of that group must also be small to avoid the new rules. If you’re not sure whether your business falls within this exemption, then please get in touch with us today.
Under the new IR35 rules, if the “end-client” hiring organisation deems a contractor to be within the IR35 rules, then the fee-payer (usually the organisation but sometimes a recruitment agency) will be responsible for deducting income tax and NICs from the contractor’s fee. Whilst that in itself may sound relatively straightforward, it isn’t and has some potentially significant implications for a number of businesses.
Implications for HR, Finance and Senior Management
If you are heavily reliant on PSC or off-payroll contractors, you now urgently need to review your business model, procedures, and policies including the following:
1. Review your workforce and collate the required information
Ideally, you need to carry out a complete audit of your workforce and contractors so that you know how they are contracted by your business and in what form or legal entity. In turn, you’ll need to assess each contract to determine whether it falls within IR35 (see below) and you’ll then also need to discuss and explain the rule changes with anyone affected. You may need to renegotiate payment rates or organise termination notices which again, is dealt with below.
Status Determination Statement (SDS)
As the hiring organisation, you have to issue an SDS in respect of each contractor following an assessment of their contract terms and working practices. If you’re doing this in-house, you need to allocate the person responsible for this and provide appropriate training as getting this assessment is not straightforward. Alternatively, you may wish to outsource to your legal team.
You cannot afford to get your SDS assessments wrong and each assessment has to be done by exercising reasonable care. Making a blanket decision in respect of all contractors, a group of contractors or simply opting not to use off-payroll contractors is not good enough or compliant. Caution is also needed in respect of bulk assessments based on contractors who have similar roles.
Your SDS assessments need to be issued by the beginning of April but a word of caution. Do not be tempted to hurry the process because if, as a result, you apply the new rules “unreasonably” this could lead to disputes with important contractors. Alternatively, of course, it could result in a tax investigation. Bear in mind, that IR35 is going to be an ongoing process that will require appropriate reviews of each new or renewed contact.
The SDS allocates responsibility for collecting tax and NIC and the hirer must notify any organisation or agency paying the contractor of the outcome as well as notify the PSC/contractor along with providing the reasons behind the decision.
Don’t rely on CEST
Check Employment Status for Tax (CEST) is an online government “IR35 status checking” tool. However, it has come under heavy criticism and is generally considered not to be 100% reliable. HMRC have said they will stand by any CEST result that finds a contractor is outside the scope of IR35, but this only applies if you have provided the correct information. Once again then the advice must be that caution is needed if you’re thinking of using this tool.
As the hiring organisation, the rules require you to have a process in place which allows your contractors to challenge your decision. You have to respond within 45 days and you also need to provide a contractor with information about the size of your organisation if they request it.
Thought needs to be given to your appeal process. The rules provide for what is described as a “client-led (hirer) disagreement process” but how this will juxtapose within any tribunal/employment law approach remains to be seen.
2. Review your existing contracts
If you are now going to be responsible for tax and NICs do you need to renegotiate your contract terms? Do you need to change fee rates, working practices, or create new contracts? Are there changes you can make that will take some workers outside the scope of IR35? Although if there are, you must make sure these are more than just superficial changes for the purpose of avoiding the scheme. You should also bear in mind, that the IR35 changes do not entitle the contractor to other statutory payments normally due to an employee.
3. Consider alternatives to PSC
Again, care and caution are needed here. Do the implications of IR35 mean that relying on PSC /off-payroll contractors is no longer a realistic option for you? In which case, careful consideration needs to be given to how you will bring your current contracts to end without risking litigation. Or perhaps it’s possible to retain some but not all of your off-payroll contractors, in which case, you need to ensure you have a fair and reasonable process for determining which ones to retain and how to mitigate or manage any disputes that arise as a result.
The use of PAYE umbrella companies that act as a middleman, collecting the tax and NIC, and paying the contractor as an employee is one alternative option. However, don’t forget that you’ll still need to end the current contracts to put this new operating method in place, and not all your contractors may agree to this. Alternatively, you may consider inviting the affected contractors to become permanent employees.
Both the above options are going to take a degree of time and work to be in place and ready by April and along with your legal, finance, and HR teams you should clearly take into account the wider implications of these changes. Whatever the outcome, you will also probably need to reconsider your recruitment processes too.
4. Review your IT infrastructure and payment processes.
Changes may be necessary in order to process off-payroll invoices. The new rules require the invoice to show the fee plus the VAT, PAYE, and NIC deductions as calculated on the fee. Then, your organisation will have to pay the net fee to the contractor and PAYE/NICs to HMRC.
Your PAYE scheme will also need to be set up to handle payments on a real-time basis as opposed to different / longer payment terms which are often common with contractors.
5. Consider IR35 insurance
As with all changes to tax rules, there’s going to be a grey area when it comes to determining who falls within the scope of the rules. To cover the costs of professional representation defending a claim brought by HMRC you may want to consider insurance. That said, an insurance policy on its own is not a viable alternative to compliance and ensuring you have appropriate policies and processes in place.
As the new rules come into force, there’s a lot to take on board and consider in order to ensure you’re both compliant and don’t risk major disruption to your operations. If you’re in any doubt about how IR35 ready you are, or if you’re a contractor with concerns about your position, please get in touch with us today.
The legal content provided by RSW Law Limited is for information purposes only and should not be relied on in any specific case without legal or other professional advice.
Copyright is owned by RSW Law Limited and all rights in such copyright are reserved. Material is not to be reproduced in whole or in part without prior written consent.