The upcoming changes to the Off-Payroll Working Rules will see the introduction of IR35 for organisations. The new rules require businesses to determine whether they are genuinely engaging the services of someone who is self-employed or whether they are a “disguised employee”.
HMRC estimates that a third of contractors will be caught by the legislation and in a bid to give employers more time to prepare, has said that the rules will apply to payments made on or after 6th April, 2020. Therefore, April 2020 is the looming deadline for employers to have evaluated whether each limited company contractor falls within the scope of IR35 beyond this point.
Level of scrutiny
When assessing each contractor, employers must demonstrate ‘reasonable care’. HR teams should seek advice and not look to apply a broad-brush approach. Incorrect assessments will only lead to trouble down the line. Seeking independent advice can provide an objective assessment of the make-up of the workforce, as businesses are anecdotally reporting difficulties in understanding the definition, making implementation harder.
An online tool is provided by HMRC to guide the decision making process, called Check Employment Status for Tax Service (CEST). The user is guided through questions covering four areas: personal service, control, financial risk and part and parcel. Given the complexity of the legislation, minimising confusion is critical to establish the rights of contractors with which you have established relationships.
Controversy around the tool centres on a perceived lack of rigorous testing before the tool was rolled out. Some criticise the emphasis placed on whether an individual can be substituted when fulfilling the contract whilst overlooking other aspects crucial to whether an individual falls within the IR35 – such as the mutuality of obligation test to determine employment status. It is the vague language used in the tool that is concerning for those wishing to identify the contractors that will fall under IR35, as the right to challenge the determinations made by CEST could leave some vulnerable.
Peace of mind
Ensuring that you take ‘reasonable care’ when determining who out of a pool of contractor workers will be subject to these regulations means looking at the arrangements of each and accounting for individual circumstances – there is no one size fits all approach. This risks becoming an administrative burden to demonstrate that ‘reasonable care’ has been taken and satisfy the HMRC, individual contractor and the employer that these obligations have been correctly fulfilled. Holistic policies that guide hirers through the process of how to make an accurate determination need to be put in place now to ensure HR professionals can work with agencies with minimal impact on resourcing and cost as these rules come into force in the near future. Using trusted partners in your supply chain and being clear in your communication with recruitment partners will contribute towards showing that you have taken ‘reasonable care’.
A review promised in the election has been launched into the new rules. However, news of the government clarifying that the IR35 will only apply to payments beyond the deadline date have dashed hopes of the regime being deferred or abandoned altogether. What was once the responsibility of recruitment agencies providing limited company contractors and contractors now belongs to companies who directly engage off-payroll worker’s businesses in defining the tax status of any contract workers they use. The objectives are focused on ensuring that National Insurance contributions and tax obligations are met and is already in operation in the public sector.
The tightening up on people labelling themselves as contractors or consultants, but in fact getting around formal employment requirements, is a key concern for businesses. The business consensus is that it is causing real problems, with ramifications particularly felt in relation to phased retirement arrangements, with key figureheads who are between retirement and full-time employment. Their consultancy status, and being retained on this flexible basis, is a key way of keeping experience and talent a little longer, enabling organisations to upskill younger workers.
The HMRC argue that unpaid tax and National Insurance contributions, from contractors operating in the private sector as limited companies to reduce their tax burdens, are running into the millions; it is therefore unlikely that any further movement is expected from the government review which is underway, with regards to the rules coming into effect on the 6th April 2020.
The rules have the potential to exacerbate the skills shortages facing some markets. Workers who fall within the IR35 may face an anxious period whilst organisations decide whether they will bear the extra cost, but the costs in replacing this talent pool with the additional benefits and headcount costs will be an important counter-argument in deciding whether to discontinue certain contractor roles. As long as assessments are accurately made and no blanket policies are enforced, accurate determinations are the first step in assessing the overall cost of these changes to the business and the impact on contractor roles currently in place.
Get in touch if you’d like to discuss how you can make your compliance with new rules as smooth as possible.