HMRC has offered to waive financial penalties in the first 12 months to businesses that make genuine mistakes with the off-payroll legislation. However, a specialist team has been established to monitor compliance and will still be looking to recoup any tax revenue due.
Consequently, companies that fail to take ‘reasonable care’ in assessing contractor tax status or seek to outsource responsibility for compliance could discover tax risk hidden in the supply chain later. At worst, they may be classified by HMRC as ‘deliberate defaulters’ and still be fined.
Thankfully, there is still time to get this right. Here are six of the biggest risks associated with short cuts surrounding IR35, and what can be done to correct them.
A blanket ban on engaging with contractors may seem an attractive and consolidated way of mitigating risk to get back to business as usual. However, it is a short-term fix and does not demonstrate the ‘reasonable care’ as required by law. If taking this approach, companies need to be careful there is not a risk hidden further down the supply chain, which could resurface at a later point.
A blanket ban is also a reputational risk to the business as it restricts the flow of off-payroll talent and creates a barrier for access to a flexible workforce when required. This is particularly pertinent during the UK’s post-Covid recovery, when demand for contractor talent is likely to be high.
Taking the time to assess roles that are outside of IR35 will pay off in the long run.
CEST or automated online tools
A free or paid for online tool is, like any tool or piece of equipment, only as good as the person using it. Although HMRC says it will stand by CEST results, this will only apply when the correct information has been provided.
The first step for using any tool is understanding how to correctly use it. If the person using the tool ends up inputting incorrect details, this could result in incorrect status determinations, tax liabilities and HMRC fines. Added to this, approximately 20 per cent of the contractor workforce cannot be classified by CEST or other automated tools so will need to be audited by a specialist to assure compliance. If you chose to use an automated tool, make sure you are confident in the process, the people using it and conduct a sample audit to double check work done to date.
Asking contractors or agencies to submit their own assessments
This is a significant risk. While it is important to engage contractors in the assessment process, the new rules clearly state that the end-hirer is responsible for status determinations. Outsourcing the whole process to contractors, accountants or recruitment agencies creates compliance risk with HMRC and may result in tax liabilities and fines – ‘marking your own homework’ is fraught with risks. Ultimate responsibility lies with the end-hirer, so it is important you have oversight of any decisions and are confident that the correct considerations have been made.
Use of umbrella companies instead of PSCs
Umbrella companies can manage responsibility for contractor payroll and tax, but it is still the responsibility of the end-hirer to ensure IR35 compliance. Umbrella companies first started appearing after IR35 was first introduced in 2000, but the sector is currently unregulated, and businesses need to be wary of non-compliant loan schemes or similar tax avoidance arrangements posing as umbrella companies.
Any alternative which offers contractors minimal employment taxes and maximum take home pay carries a serious health warning and should be properly researched. To ensure the business maintains visibility and control throughout the supply chain, it is imperative that only trusted partners are collaborated with – ideally umbrella companies with FCSA accreditation.
Statement of work and outsourced services
Labelling a contract as a ‘contracted out service’ or a ‘statement of work’ (SoW) will not prevent IR35 rules from applying, as the definition of the ‘client’ for IR35 purposes can move in the supply chain where a true outsourced service or SoW is provided.
This sees the ‘reasonable care’ obligation move with the entity defined as the ‘client’, meaning an outsourced service or SoW does not remove the risk or responsibility of completing the IR35 assessment, it simply moves to the SoW provider.
IR35 ‘tax loss’ insurance
As with other areas of insurance, IR35 tax loss insurance is only valid if you have taken all due precautions to mitigate risk and followed the correct processes. This presents the real risk of the insurance not paying out if the process has not been managed correctly. If the process has been managed correctly, it begs the question as to why incur additional costs on insurances that are unlikely to be required.
By acting properly now, businesses can ensure they get IR35 right. Those that do will minimise tax and operational risk, such as delays to critical projects due to loss of or inability to attract resources, while maximising their ability to retain and attract contractor talent as the economy picks up again.
Matt Fryer is head of legal services at Brookson Legal