The fact that Rishi Sunak chose not to address IR35 in the budget on 3 March told us everything we needed to know – the reforms to the off-payroll rules in the private sector will certainly be introduced on 6 April, as was decided last year when the pandemic hit the UK.
There will not be any last-minute U-turns. No more sensational delays at the eleventh hour. These controversial tax changes are going ahead and businesses must therefore make sure they are compliant.
The reform will see medium and large businesses become responsible for assessing the IR35 status of the contractors they engage, with fee-paying recruitment agencies poised to be transferred the liability.
So what now? How can employers manage IR35 reform? What steps must be taken to ensure IR35 compliance, retain contractors and manage the risks presented by the reform? Let’s take a look.
Assess IR35 status
By 6 April, all contractors must have had their IR35 status assessed by the end client, who must take ‘reasonable care’ when carrying out status decisions. What’s reasonable care? It’s an HMRC requirement designed to ensure businesses make fair and well-considered determinations – in place to prevent blanket IR35 decisions, which result in all contractors being placed inside or outside IR35 irrespective of their actual status.
Do not rely on CEST
When making IR35 decisions, I urge businesses not to rely on HMRC’s tool, check employment status for tax (CEST). For far too many reasons to go into in this article, CEST is fundamentally flawed and not fit for purpose. Aside from failing to align to IR35 case law, having been dismissed in court numerous times and being a one size fits all tool, contractors simply don’t trust CEST. By using it, businesses won’t just risk their IR35 compliance – they’ll struggle to attract contractors who, for the right reasons, are wary about having their status decided by the taxman’s very own technology.
Fortunately, CEST isn’t mandatory. Independent IR35 status reviews constitute reasonable care, while many companies that insist on using CEST will often have any answers double-checked by IR35 specialists.
Distribute status statements
When a contractor has had their IR35 status set, the end client must issue a status determination statement (SDS). This is a document that outlines the deemed IR35 status along with a detailed explanation of the factors that led to this particular decision – these requirements need to be fulfilled otherwise the SDS is non-compliant.
Failure to issue contractors (and the second party in the supply chain) with an SDS will see a hiring business take on the fee-payer’s duties, assuming they don’t carry these already. In short, this means they’ll be responsible for deducting tax on inside-IR35 engagements and will shoulder the liability.
Organise payroll processes
If the end client decides a contractor belongs inside IR35 they must ensure compliant payroll processes are in place to deduct the relevant tax. This tax must then be paid directly to HMRC (the contractor will be paid their invoice minus the tax).
These processes should be ready to go by 6 April, to make sure a contractor is taxed correctly and that HMRC receives what it is owed. While many end clients will outsource this to fee-paying recruitment agencies, it’s nonetheless vital that it’s organised when IR35 reform lands and is managed by a trusted provider in a compliant manner.
Review supply chain compliance
Expanding on this, it’s crucial that end clients ensure compliance throughout their supply chain. As challenging as IR35 reform has been for many businesses, it has given firms the opportunity to review all contracts they hold – with contractors themselves, agencies and, in some cases, consultancies that provide these workers. I highly recommend that businesses assess the IR35 compliance of their supply chain. After all, it takes just one mistake or a simple oversight for an engagement to become non-compliant, which could result in tens, if not hundreds of thousands, in tax liability payments.
Consider exposure to risk
The perceived IR35 risk is the major reason some businesses will no longer engage contractors after 6 April, insisting they all work as employees or via umbrella companies.
However, banning contractors in response to IR35 reform is needless. By all accounts a business needs to assess and recognise the financial risk presented by the changes, but that’s not to say panicked, risk-averse decisions are required – far from it, in fact.
Non-compliance can be protected against by taking out an IR35 insurance policy, which covers the cost of advice, representation in court and resulting liability payments, interest and even fines.
Here are a few other tips that employers may find useful:
- Keep a clear audit trail by documenting and storing everything.
- Appoint an IR35 project team whose responsibility it is to manage these processes.
- Communicate with contractors and involve them in IR35 status decisions.
- Allocate IR35 reform the time and resources it clearly deserves.
While costly if mismanaged, by taking the above steps businesses will be able to compliantly implement these changes and keep hold of contractors who, in these uncertain times, provide vital skills, flexibility and cost efficiencies. However, with just weeks to go until IR35 reform in the private sector arrives, to state the obvious – there is not a moment to waste.
Seb Maley is CEO of Qdos