With the reform of IR35 for the private sector set to happen in April, it will become the responsibility of the end client, as opposed to the contractor, to review current and future assignments to ensure that the contractor’s tax status has been correctly determined.
The pitfalls with this piece of legislation lie not only in determining whether a contract assignment falls ‘inside’ IR35 – subjecting them to PAYE and potential higher taxes – or ‘outside’ IR35 – meaning contractors are allowed to pay themselves a salary, draw the remainder of income as dividends, and remain responsible for their taxes – but also how to best approach, and reconcile, contractors from both classifications.
One of the key risks associated with engaging in a business-wide ‘inside’ IR35 determination is the potential for a reduced talent pool of highly skilled contractors to choose from. For contractors bringing specialist skills into a workplace, operating outside of IR35 is generally a much more attractive prospect both financially and professionally. Businesses solely seeking to engage contractors inside IR35 run the risk of being a less desirable option to the contractor workforce.
It is also likely that companies will need to accommodate for increased rates when asking contractors to operate inside IR35. Under new legislation, businesses could be required to enrol contractors on PAYE, which comes with additional costs such as pension, paid holiday, sick pay and national insurance contributions, costing employers extra expense and making contractors a pricier option when classified inside IR35.
Additionally, in the case that a contractor operating outside IR35 is terminated or decides to leave because of the new legislation, businesses may face disruptions on critical projects as finding replacement specialist expertise could be costly and time-consuming.
The undesirable consequence of conducting incorrect IR35 determinations could see the potential premature departure of contractors who will look for an assignment that is correctly determined with another end client. In this scenario, companies may face an increase in fees or rates for equal services and are likely to find themselves needing additional resources to replace those who have departed where a blanket determination has been made – ultimately putting a pause on scheduled work.
Managing the change
Pragmatically assessing each assignment on a case-by-case basis would be a prudent measure. In doing so, businesses will benefit from commercial attractiveness to the talent available and will therefore have a heightened capacity to secure access to multiple high-quality specialised limited company service providers.
Companies should also prepare documented process maps to guide each IR35 engagement and establish an internal working group to optimise business processes and responses in the face of a potential HMRC investigation. Taking a communicative and transparent approach to enforcing the new legislation with existing and contracted workers will ensure the continued success of the business, the ongoing trust of contractors and the retention of top service providers.
Carefully tackling each assignment individually means employers will avoid falling into certain traps along with the considerable risks associated with blanket IR35 determination. Moreover, such a strategy will avoid a problematic scenario where a business ought to transition through multiple positions, in an already complicated period of change.
Charlie Cox is commercial manager at SThree