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IR35: are you prepared?

by Gordon Whyte on 11 Jul 2019

IR35

IR35 has been a hot topic ever since the Government confirmed it intends to roll out the 'off payroll' rules already applied in the public sector to the private sector from April 2020.

Since these changes were announced, we have been heavily involved with a wide variety of stakeholders to stay abreast of developments and to help our candidates and clients prepare for the tax and business implications ahead.

Most recently, we ran a breakfast seminar in partnership with Mark Groom at Deloitte to assess the best options available to both businesses and interims and the potential next steps.

Here’s a quick overview of the highlights.

What’s changing?

As things currently stand, contractors and interim employees are responsible for paying their own tax contributions. As of April 2020, the responsibility for setting IR35 status will shift from contractors to the private sector companies that hire them.

For businesses, this means they will be legally required to ensure their contractors are paying the correct tax contributions or risk penalties and being liable for any unpaid taxes themselves.

For contractors, this means from April 2020 they may be taxed as an employee rather than as self-employed. Their employment status will also be decided by the client – whether they are a genuine contractor (outside IR35) or an employee for tax purposes (inside IR35). The contractor will no longer have a choice or control over this decision.

CEST tool

Those who are familiar with the HMRC’s IR35 CEST tool to assess IR35 status will not be surprised that an upgrade is on its way.

In some cases the tool has been unable to establish employment status and critics claim that it excludes certain key status indicators, while being overly reliant on others, therefore giving inaccurate results.

That said, in discussions we’ve had it’s been suggested that if you receive an 'outside IR35' decision then you can be reasonably assured that you can continue operating on this basis. If, however, you receive an 'inside IR35' result then this should serve as a warning to investigate the contractor’s employment status further.

On this basis, while the tool is useful for obtaining an overview of the workers status it is not recommended that businesses have sole reliance upon its results. Instead, the tax status should be determined by undertaking a review of the contractor’s contract and working practices, considering each employment status indicator.

Risks

The aim of IR35 legislation is to close loopholes that allow people working through personal service companies to avoid tax contributions, which the government says will cost some £1.3bn by 2023-24.

However, the reforms have come under heavy criticism by tax professionals and businesses alike.

In short, much anxiety stems from the time and resource needed by businesses to assess contractors on an individual basis – and whether this will lead to some businesses taking a blanket approach where all contractors are forced to work within IR35. Or encourage businesses to reduce the number of contractors they hire altogether.

Simultaneously, some highly skilled contractors may be forced to join ‘umbrella companies’ and pay more tax and national insurance, and so may decide to go down an employment route – thus reducing the contractor talent available in the market, creating workforce gaps and stalling key projects.

However, while there will inevitably be people and businesses adversely impacted by these changes, it should also be noted that many contractors – the majority of the market –will continue to fall safely outside IR35, and for them April 2020 is business as usual.

With this in mind, it is within the interests of the business to properly establish a contractor’s employment status to ensure they continue to access the best talent in the market, on contract terms that work for both parties.

What's the next step?

From talking with our networks, BIE’s view is that a legislative change does not affect the demand for talent to be engaged as a flexible resource, or for individuals to offer their niche skills to multiple organisations other than in a full-time permanent capacity.

If they haven’t already, businesses must now prepare thoroughly and decide on the approach they plan to take. This may include identifying the key people within the business responsible for managing these changes, undertaking a full risk assessment and considering their long-term strategy.

We are committed to working in line with HRMC’s IR35 changes to help facilitate the opportunity for organisations and individuals to mutually benefit from working together in a flexible way. We will of course keep you updated and informed as any developments unfold.

In the meantime, if you’d like to have an informal chat on this topic do feel free to reach out to our recruitment specialists.

 

* Nothing on this website constitutes legal advice and should not be treated as such. The contents of this site are for general information purposes only. Whilst we endeavour to ensure that the information on this site is correct, no warranty, express or implied, is given as to its accuracy and we do not accept any liability for error or omission.

Gordon Whyte

Written by Gordon Whyte

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