As we arrive back from the Easter break, tens of thousands of organisations and contractors begin to face the brave new world of IR35 regulations. The hopes of many for another last minute reprieve from IR35, as witnessed in 2020, was not to be, and for those who have utilised the ostrich approach of burying their head in the sand up until now, the 6 April 2021 is going to be a somewhat of watershed moment in the contracting of staff.
For those of you who have done your homework, you will appreciate that IR35 will completely change the way that organisations utilise contractors, especially those operating through “intermediaries” including personal service companies and employment agencies. If you are the end user being provided with the services, IR35 will lead to increased workload, both in respect of additional checks and paperwork and potential subsequent payroll processing.
Whilst there is already a plethora of articles and advice available online for those exploring IR35 for the first time, below is a snapshot of actions and tips for organisations caught by IR35:
- Assign an individual in the business to carry out the status determination test. Whilst many companies have left this in the hands of payroll, the individual carrying out the test out on behalf of the company must be able to understand the exact nature of the assignment, and in particular, the amount of control the company will have over the contractor;
- Carry out checks on every contractor on every assignment and provide them with a status determination statement. Remember that it is not just the individual that is being checked, it is the assignment itself. Just because an individual is outside IR35 on one assignment, they may be classified as inside IR35 on another assignment;
- Use the CEST tool and retain copies. HMRC has promised to stand by the result of the CEST tool (available here https://www.gov.uk/guidance/check-employment-status-for-tax ) as long as answers have been provided with reasonable care. The results from the CEST tool will be key in showing that an organisation complied with their obligations;
- Do not undertake blanket IR35 checks when taking a number of individuals on one assignment;
- Prepare template outcome status determination statement documentation ready to roll out to contractors or intermediaries confirming the CEST outcome;
- Ensure an appeal process is in place. Appeal outcomes must be provided within 45 days.
- Consider IR35 insurance options. Although admittedly costly at the current time, should your organisation have grave concerns about IR35, an insurance policy may give you the reassurance that you need in the early years.
In addition to the above, end user clients should ensure they have plans in place should contractors refuse to undertake work in circumstances where they fall inside IR35. Does your organisation have an alternative pool of contractors or contacts to call upon in such circumstances? Do your contracts provide sufficient indemnity for any additional tax, national insurance or other financial liabilities incurred by you as a company? What if a contractor falls within IR35 and demands employment rights? This all needs to be considered as part of the new IR35 regime from 6 April 2021.
We have, over the course of the last year, seen organisations take extreme measures such as refusing to engage with individuals who work under personal service companies. We believe that this is an overreaction to the new legislation, however it is one that mirrors the original implementation of IR35 in the public sector back in 2017. It is perfectly lawful to continue to engage individuals with personal service companies, however additional care must be given, especially regarding control, substitution and the integration of the contractor into the company. Remember that what may be contained in a contract or CEST outcome may be completely different to what happens on the ground and HMRC will be looking closely to see if the contract mirrors that of the working relationship.
Amongst all the doom and gloom, there is some good news however. HMRC have confirmed that accidental errors in determining status of individuals will not be penalised for the first year, namely until April 2022. Any mistakes made must be genuine, however, and a simple ignorance of the rules or refusal to carry out status determination testing will still see hefty penalties and tax liability for organisations.
One final word of warning is for those small businesses who aren’t yet caught out by IR35. Whilst you may have escaped the vast majority of IR35 legislation to date, it is highly anticipated that small businesses will be included in the very near future. With just under six million small businesses registered in the UK, it is clear to see why HMRC are now turning their eyes to the next money tree to bear fruit and small businesses will, unfortunately, be seen as easy pickings. It will take more than heads in sand to avoid HMRC this time.
For advice and support regarding the implications of IR35 on your organisation and the way in which you recruit/use contractors, please contact Steve Conlay (firstname.lastname@example.org 01242 248444) or another member of the BPE Employment team. You will also find a number of other articles on IR35 on the our website.
These notes have been prepared for the purpose of articles only. They should not be regarded as a substitute for taking legal advice.