Temporarily returning responsibility for IR35 back to contractors has allowed companies to focus their resources on their response to the Covid-19 pandemic. With pressure on HMRC to recover tax revenue in 2021, however, it will be a mistake for hirers to kick the issue too far into the long grass.
The legislation has now been incorporated into the 2019/20 Finance Bill, so we now have certainty on what the changes will be, when they will be introduced and what must be done to prepare for them.
Not a priority?
Given the current situation, IR35 has been deprioritised by many companies as something to worry about nearer the time. In fact, the government’s deferral suggests that HMRC had good reason to believe that the private sector was not prepared for the original deadline.
When the delay was announced, a large number of contractors assumed they could ignore IR35 for another 12 months by working ‘outside’ of it. Some agencies also started placing contractors in new roles via their personal service company without considering IR35 compliance.
With contractors and agencies returning to business as usual, there is a risk that many hirers will now follow the same pattern as they did in the run-up to April 2020, leaving it too late to dedicate the time and resource needed for proper status assessments. This is not the best approach to take.
For those businesses that did invest the time and resource into preparing for changes, this is a valuable opportunity to review whether the right decisions have been made and that the necessary processes are in place. The challenge will be keeping both internal and external stakeholders engaged over the next year.
Learning from the past
There were huge complications with the public sector roll out in 2017. We saw a number of businesses make a knee jerk assessment of their contractors. Widespread blanket assessments then resulted in contractors terminating their contracts and finding work elsewhere, including Transport for London, which revealed that this caused significant delays to its repair programme. Prior to the postponement of the deadline, these issues looked set to repeat again in the private sector.
It is critical that hirers learn from these mistakes. To help the private sector, Jesse Norman MP recently announced further research into the public sector rollout in 2017, with the results expected in advance of the new April 2021 deadline. Hopefully, this will be in enough time to influence business policies.
A contentious issue
One key learning from the public sector changes in 2017, and the run-up to the deferred private sector change, is that IR35 is a contentious issue and all parties may have differing opinions on the employment status of the contract.
This is because some contractors assessing their status, either themselves or using an adviser, may deliberately be influencing the outcome to reduce tax. Other contractors may not be assessing their status at all – either ignoring the rules to avoid tax or simply not aware of them because they don’t have a good accountant. Some contractors are not averse to this risk, believing that HMRC don’t have the resources to police the rules.
Hirers, on the other hand, often don’t have the knowledge or expertise to assess employment status and are risk averse or are working with risk-averse agency supply chains. They have good reason to be fearful too. HMRC is more likely to police larger businesses and the financial impact of penalties can be substantial.
Perhaps for these reasons, in March many companies appeared to still be taking a blanket approach to the reform. The government has since provided further clarity on this issue, however, with Norman reiterating in Parliament that “status determinations must be based on an individual’s contractual terms and actual working arrangements”. This will take time and care, but any company that continues to apply a lazy blanket approach after April 2021 will be taking an unnecessary risk.
To avoid last minute complications, hirers and contractors should use this breathing space as an opportunity to enter into early dialogue and discuss how they best want to work together.
Contractors should be encouraged to manage their obligations correctly prior to April 2021 and share their employment status decision with their clients, who in turn should be using this to help determine their status moving forwards. This allows time to work out any issues ahead of implementation.
The clock is ticking towards April 2021. If all parties are to get the best possible result when it comes to IR35, communication and collaboration are key.
Matt Fryer is head of legal services at Brookson Group