You've done your IR35 audit – now what?

Employers have a number of options they can explore once they have undertaken their off-payroll workforce audit, as Matt Fryer explains

With the changes to the off-payroll working rules set to come into force in April 2020, many HR professionals will spend the next few months assessing whether the contractors they work with fall ‘inside’ or ‘outside’ IR35. It’s a confusing area of employment law, but the new rules require private sector businesses to take responsibility for deciding whether a contractor is genuinely self-employed or, in the words of HMRC, a ‘disguised employee'.

While there are various digital solutions – including HMRC’s criticised CEST tool – which offer support in terms of IR35 assessments, the human approach is best. HR professionals should ensure their workforce audit is conducted correctly and fairly. If not, they could face more issues down the line if contractors decide to appeal their decision. 

Once these complex employment status tests have been conducted and HR teams understand which of their contractors now fall inside IR35, they must decide their next steps in terms of how they continue working, and consider how they will communicate these options to their impacted workforce.

Cut ties with contractors

Businesses could take a blanket ban approach to IR35 – similar to HSBC, which recently revealed it will cease engaging with limited company contractors to save the business from having to assess them under the April 2020 changes. 

This will not be practical for most businesses that rely on access to a flexible pool of labour, so it’s important that companies understand they don’t need to lose their contractor talent to be compliant. Our recent business research found that, when asked what their biggest fear was with regards to IR35, a third of UK businesses said losing their contractor workforce. 

Change the way you use and manage contractors

Some contractors who initially appear to fail the employment status test might be able to retain their contractor status by making a few key amends to their contracts and working practices. This could be a win-win situation for both parties but should not be seen as a silver bullet and should be approached with care and having taken appropriate advice.

Keep engaging via a PSC 

For contractors who are found to be inside IR35, one of the attractively simple solutions is to continue working with contractors via their personal service companies (PSC). You would, however, need to ensure that the correct taxes were being deducted prior to payment and consider whether the additional costs of employers' national insurance contribution (NIC) and apprenticeship levy are to be funded by you or by the contractor. 

This could result in a significant reduction in income for contractors, however, and it will mean they continue to incur additional costs in terms of accountancy fees and maintaining professional indemnity insurance. It is not a particularly tax-effective way of operating for contractors, so they are unlikely to be happy with it, but it will mean that as an employer you have met your obligations for tax purposes if your IR35 assessment is correct.

Take on payroll

In many scenarios, making ‘disguised’ employees, who are critical to the business and are expected to remain with you for a long period of time, ‘on payroll’ may be the correct result, but it needs to be thought through carefully as it will bring with it its own challenges. 

There are costs associated with employee rights, such as sick and holiday pay, and additional resource and investment will be required in terms of career development, training and skills. It also makes contractor resource less flexible and removes your ability to scale up and down as projects require. 

Some contractors may not want to join the payroll – they may prefer the flexibility of their current status and be resistant to becoming a ‘permie’. In this case, HR teams will need to be understanding and work with them to find the next best option. 

Work via an umbrella or agency payroll

A final option is to work with an agency or umbrella company. This means that having assessed your contractors, you can pass on the employment of the contractor and the associated payroll administration of those found to be inside IR35 to an external organisation, which will then work with the contractor and organise tax deductions on their behalf. If choosing this option, businesses should ensure the supply chain is only engaging with compliant umbrella companies. An easy way to manage this is mandating the use of FCSA-accredited umbrella providers. 

The benefit of using an umbrella company for a career contractor is that it offers the contractor continuity of employment (if they find roles via multiple agencies), which can help with mortgages and loan applications, and also avoids the fluctuations in tax codes that often arise when contractors work across different projects for different engagers. 

If handled correctly, IR35 shouldn’t lead to an exodus of contractors. Contractors are a valuable and flexible resource that can be scaled up or down according to need and so it is vital that you evaluate each relationship case by case. 

Matt Fryer is group compliance director at Brookson Legal