After being pushed back a year in 2020 because of the coronavirus pandemic, new off-payroll working rules finally come into force in the private sector today (6 April), shifting the onus for who is caught by the tax rule from the contractor on to their employing organisation.
The rules, known as IR35, were first introduced in 2000 to ensure people who were working like an employee, but through their own limited company, paid broadly the same tax as someone employed directly.
Previously, contractors providing services for organisations outside the public sector were themselves responsible for deciding their employment status for tax purposes. Now, the onus is on the employing organisations to assess contractors’ IR35 status. The change is designed to tackle employer non-compliance with the rule, which the government says is estimated to cost the Exchequer £1.3bn a year by 2023-24.
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The reform was meant to be rolled out in April 2020 but was pushed back by 12 months to give businesses struggling with the fallout from the Covid pandemic more time to prepare, and now brings the private sector in line with the public sector, where the rule has been in force since 2017.
However, the change has proved controversial among private sector employers. According to a 2019 poll of more than 500 UK businesses, conducted by Brookson Legal, more than half (59 per cent) were reportedly considering taking a ‘blanket approach’ to the changes because they “did not have time to assess cases on an individual basis”, and a majority of businesses were confused about the potential implications of the changes to off-payroll rules.
A new HMRC requirement that employers take ‘reasonable care’ when assessing contractors’ status has been specifically designed to ensure firms make fair, well-considered determinations instead of blanket IR35 decisions that group workers either inside or outside IR35 irrespective of their actual status.
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The department has made available its check employment status for tax (CEST) tool – which it updated last year – to help businesses make determinations. However, the tool has been controversial, with some experts warning it does not take into account some of the key tests for whether a contractor is caught by the rules. Last December, the government’s own statistics showed the CEST tool was unable to make a determination in a fifth of cases.
Matt Fryer, head of legal services at Brookson Legal, said there had also been an increase in firms implosing blanket bans on the use of contractors, warning that this was not a sustainable position businesses to take. “With the economy gearing up for recovery from the pandemic, not having an appropriate IR35 solution in place is a real risk in terms of attracting and retaining a highly talented flexible workforce,” he said.
“Processes need to be embedded throughout the company to ensure continuity, including undertaking a fair and accurate employment status test, managing the process of any challenges to status determinations, contract migration and recruitment,” said Fryer, adding that employers also needed to maintain visibility of the temporary workforce in their supply chains.
Charles Cotton, research and policy adviser at the CIPD, said organisations had to work out the practicalities of assessment sooner rather than later, including whether or not HR would be at the helm. “If it’s another department, then it makes sense to check what help it will expect from HR. This will help to determine your respective roles and responsibilities, as well as setting expectations,” he said.
“For example, while another team might be responsible for making the assessments, it might still want HR’s help when it comes to communicating with contractors, or it might want HR to set up an appeals process in case some contractors are not happy with how their contracts have been determined.”
Cotton added that any HR team now responsible for IR35 assessments should check what might have happened in the past – for instance, whether there are any legacy issues that HR should know about, as well as any views or personalities of which they should be aware.
It should also check whether there is an existing list of the contractors who work via a personal services company for the organisation, or if one needs to be created by talking to each department, not forgetting about those who have contracts with agencies.
The government has responded to concerns from both businesses and the self-employed by announcing that firms that accidentally fall foul of the rules will not face fines during the first year of the new rules.
“We will not charge a penalty if you took reasonable care to apply the off-payroll working rules correctly but still made a mistake, including making mistakes in status determinations,” official guidance stated, saying that unless there was evidence of deliberate non-compliance, HMRC would encourage employers to “self correct” errors before considering whether the government needed to intervene further.