Regardless of the fact that further IR35 changes will not be introduced until April of next year, it’s vital that medium and large companies in the private sector – the organisations that will be made responsible and liable for administering IR35 status of the contractors they engage – get ready for reform in 2019.
After the introduction of similar changes in the public sector in 2017 resulted in many contractors being wrongly placed inside IR35 (meaning they are effectively taxed as employees but without receiving any employment rights), independent workers are understandably fearful of incoming private sector reform. In many respects, they are preparing for a similar situation and remain concerned that private sector companies will make risk-averse IR35 decisions to protect their own liability.
For private sector companies to be able to continue attracting independent workers in years to come, they must ensure they are in a position to make accurate IR35 decisions well before reform actually arrives. And the thousands of engagers that rely on the flexibility and expertise of contract workers – who incidentally become even more valuable in times of economic uncertainty – would be wise to put processes in place this year.
Should these companies take IR35 reform seriously and prioritise preparations, they will be in a strong position to manage changes. That means they will be able to continue engaging contractors outside IR35 while, at the same time, protect their own liability when reform is introduced next year. There are a number of steps I would advise:
Communicate with contractors
Independent workers have been unsettled by the news that the power to set IR35 status will soon be placed in the hands of their engager, as it has been in the public sector. Now is the time for private sector companies to reach out to contractors and reassure them they will be ready to make well-informed and ultimately accurate IR35 decisions upon the arrival of reform.
Companies offering transparency and clarity to contractors will be better placed to attract them when changes are introduced.
Collaborate with contractors
Engagers need to involve contractors in IR35 decisions. It’s very difficult to administer IR35 correctly and consistently without discussing details unique to an individual’s working arrangement. HMRC’s IR35 tool, CEST, for example, doesn’t require input from a contractor when providing an answer. This is one of the reasons we advise against using the tool solely to assess status.
Many contractors will have already undertaken their own due diligence and collated evidence when it comes to their IR35 status. It’s also important this is taken into consideration.
Assess your resources
Engagers should avoid blanket inside-IR35 decisions at all costs – this largely contributed to many inaccurate determinations in the public sector and will just deter contractors. Companies should factor in that IR35 must be administered with reasonable care and equip themselves with the expertise needed to assess status on a case-by-case basis.
Organisations engaging a large number of contractors must take this into account. In short, the sooner they start reviewing the status of the independent workers they already engage, the better. When private sector changes are introduced next year, they won’t be forced into panicked decisions.
Consider your method
Companies aren’t legally obliged to use CEST when setting IR35 status. Given the tool’s well-documented flaws, engagers should think about how they plan to make accurate IR35 decisions consistently. Engagers can do this themselves, engage the help of an IR35 specialist, rely on CEST or do it any way they see fit. What is vital is there is a clear audit trail to justify any decision that has been made should HMRC come knocking.
As unsettling as IR35 reform appears, companies can lessen the disruption through a proactive approach this year. To a certain extent, these engagers have the luxury of time to prepare, but given the size of the task ahead, it’s essential they use this time productively.
Seb Maley is CEO of Qdos