In March this year, the government announced a 12-month postponement to the implementation of the off-payroll legislation in the private sector on account of the Covid-19 pandemic, affording many companies a second chance to establish much-needed compliance processes.
Businesses that have so far failed to prepare for the off-payroll legislation must use this time wisely – a point emphasised by the fallout from the 2017 rollout of the rules to the public sector. Here, inaction by hiring organisations typically resulted in the widespread adoption of non-compliant blanket approaches to status assessments, causing contractor walkouts, recruitment struggles and disruption and delays to projects.
Those thinking about taking a similar approach must acknowledge several issues:
- contractors who believe they are outside IR35 are highly unlikely to accept an ‘inside IR35’ contract;
- contractors who do accept an ‘inside IR35’ engagement will likely increase their rates to compensate for the accompanying tax increase; and
- firms that rely heavily on contingent labour and cannot afford to pay up to 40 per cent more for contractors must adopt a compliance regime.
For these reasons, businesses need to consider the risks, such as how dependent they are on contractors and how they stand to be affected by their planned approach to the off-payroll legislation. Can you handle the disruption and damage associated with a blanket approach, or is a considered compliance process necessary?
How much time do we have to prepare?
Those opting to comply with the off-payroll legislation have until 6 April 2021 to get their house in order, although your timeline for preparation will depend heavily on the length of your contingent engagements. Contracts that begin before April 2021 but overlap beyond this point present a tax risk to companies that haven’t confirmed the IR35 status of said engagements through adequate preparation and the implementation of robust compliance processes.
This means companies hiring contractors on three-month contracts feasibly have until January 2021 to establish compliance protocol, whereas those engaging contractors on six-month contracts have until October 2020, and so forth. To afford more preparation time, your company might consider temporarily issuing short-term contracts – an approach that many will likely have already taken given the current circumstances regarding Covid-19.
Having reviewed your contract engagements, you will have a better idea of how much time you have left to get organised. However, businesses should act well in advance of their effective deadline to afford themselves ample time to establish an effective and comprehensive compliance regime.
Establishing a quality compliance solution
With many businesses still expected to respond to the new rules in a knee-jerk manner characterised by blanket measures, an accurate and fair status assessment courtesy of a quality compliance solution or provider will have a significant amount of pulling power in the contract market. There are several characteristics to seek in a compliance service, including:
- Demonstrably accurate status assessments
- Compliance services that offer ongoing protection
- Access to tailored IR35 advice and guidance
- Services underwritten by reputable insurers
While contract reviews by some IR35 legal specialists will tick these boxes, the necessary expertise is in scarce supply, and few organisations will have the capacity to assume the work required of them by firms with large flexible workforces. Fortunately, specialist, scalable compliance solutions are available online, providing easy and affordable access to the necessary expertise.
While HMRC also advocates its check employment status for tax (CEST) tool for status assessments, the consensus within the contract market is that the tool is skewed towards delivering ‘inside IR35’ determinations. Furthermore, the taxman has been known to challenge CEST’s outcomes, resulting in significant tax bills for some of its users.
Evaluating your contingent workforce
In the meantime, establish which contractors require status assessments – ie limited company contractors who you intend to retain beyond April 2021. At this stage, an initial assessment of each engagement based on the information at hand can help gauge which contracts pose problems and which projects might be at risk because of the off-payroll rollout.
Having evaluated your contingent workforce, a quality compliance solution or provider can help identify engagements posing an IR35 risk and propose risk mitigating wholesale changes to working conditions. Changes at this stage can prove highly beneficial, though they must be rigidly applied in practice and reflected in updated contracts.
Unfortunately, despite changes made to working practices, it may be impossible to retain certain contractors on an ‘outside IR35’ basis. Though contractors can obviously work within scope of the legislation, the costs of such engagements need to be considered by companies, with some contractors likely to increase their rates in response to their deemed status and subsequent tax increase.
Address engagements before April
All will become clear once full status assessments have been conducted and outcomes communicated to your contractors. Having considered the financial impact of ‘inside IR35’ engagements on your business, you should have an idea of your ceiling with regards to any rate renegotiations that you may engage in.
Contractors who you cannot come to an agreement with will need to be served termination notices, while an engagement model for those remaining on an ‘inside IR35’ basis will need to be agreed. With the renewed rise of non-compliant payroll schemes an increasingly prominent concern in the market, the safest course of action for firms seeking to engage employee-like temporary workers is to simply issue fixed-term employment contracts.
All of the above needs to happen before April 2021, but off-payroll compliance is an ongoing process. Remember that working practices must continue to reflect the written contract to effectively mitigate risk. Monitoring the status of contractors on an ongoing basis is the only way to ensure none of them go ‘off-piste’, threatening you with an unexpected tax bill up to six years later.
Though off-payroll compliance may seem burdensome, it is a relatively swift and simple process for businesses that act early and adopt a quality compliance solution. Fulfilling these requirements should ensure your company continues to benefit from ad-hoc access to key skills without any of the damage or disruption that the off-payroll legislation threatens.
Dave Chaplin is CEO of IR35 Shield and ContractorCalculator