There is just a matter of weeks before the new off-payroll rules take effect in the private sector, with medium and large-sized firms becoming responsible for assessing the status of their contracting workforce. Some have been scared into adopting an ‘on-payroll only’ stance. However, the supply chain can be well protected if a robust compliance-led process is adopted. Non-compliance could be far more damaging. Businesses that are unwilling to engage with the off-payroll rules are allowing fear to damage their competitiveness and their bottom line.
Off-payroll risk debunked
While the chances of being subject to an HMRC investigation are small, that should not be used as a reason to take a lax approach to compliance – quite the opposite. HMRC’s inspectors typically target the low-hanging fruit, meaning firms that conduct comprehensive status assessments diminish their chances of attracting the taxman’s attention in the first place.
Even if HMRC comes calling, a compliance-led approach that also gathers evidence throughout the engagement to reinforce the status determination should prove enough to halt an investigation dead in its tracks.
What will non-compliance mean for hirers?
Though off-payroll compliance has a minimal tax risk, this has not prevented some businesses from exaggerating the dangers of the legislation for their own gain. Some firms are using scaremongering tactics to encourage companies into risk-averse responses, typically resulting in the onboarding of entire contingent workforces on to a consultancy’s associated payroll model.
But though such blanket measures negate the tax risk posed by off-payroll, they also pose significant threats. A survey conducted by IR35 Shield of 3,000 contractors found that nearly two-thirds (65 per cent) seek to avoid working inside IR35 and 72 per cent would quote a separate rate for engagements deemed inside IR35.
This means hiring firms that fail to consider outside IR35 engagements will find themselves at the back of the queue when the most sought-after contractors decide on their next engagement.
Adopting a compliance-led approach
Contrary to popular belief, mitigating tax risk while remaining competitive via off-payroll compliance is not difficult to achieve if agencies and hiring firms work together to ensure that:
- status assessments are accurate;
- ongoing working conditions continue to reflect the deemed status; and
- evidence reinforcing the deemed status is documented throughout the engagement.
Parties also need to take care to satisfy the off-payroll’s reasonable care requirement. The legislation requires that reasonable care be demonstrated in a status determination statement detailing the reasons behind a status decision. Though satisfying such requirements for each individual engagement may seem like a tall order, compliance solutions are available that tick the necessary boxes and reduce users’ workloads.
Although it is likely to be an effective deterrent, a compliance-led approach cannot completely prevent the taxman’s advances. It therefore pays to be prepared in the event of an IR35 investigation. HMRC begins its off-payroll investigations by posing various questions about the engagement to the hiring firm. And provided the firm can provide ample evidence that its regime is robust, an expert adviser should be able to shut down a case before it has got going.
Securing added protection through insurance
One thing hirers shouldn’t do is rely on insurance alone to protect them against HMRC. Insurance products are not a substitute for compliance and policies will not provide cover where the claimant has failed to fulfil their own obligations. If you do things properly, you shouldn’t need insurance.
However, IR35 can sometimes be subjective and, therefore, insurance could prove useful as an additional layer of protection. But make sure your policy includes at least six years to cover any claims for carelessness that would result in a retrospective enquiry and provides adequate cover throughout the courts, with at least first-tier and upper-tier tribunals covered in the policy.
Nothing to fear
Despite some of the messages purported by HMRC and industry service providers, hiring firms need not fear the IR35 bogeyman. Any risks that businesses encounter will be of their own making, whether through refusal to engage contractors outside of IR35, inadequate compliance processes or slow status assessments.
From April 2021, many firms are set to let fear of the off-payroll rules cause untold damage to their business. The remedy – a compliance-led approach underpinned by a quality compliance solution – is easier to apply than most realise.
Dave Chaplin is CEO of IR35 Shield