What not to do when implementing IR35 reform in the private sector
With IR35 reform in the private sector looming, thousands of businesses are busy preparing for the introduction of the off-payroll changes, which will be rolled out on 6th April.
The reform will see medium and large businesses become responsible for determining the IR35 status of contractors, with the fee-paying party in the supply chain poised to pick up the liability.
However, given the IR35 rules are notoriously complex, knowing how to manage IR35 reform in a compliant manner can be confusing.
In this article, we’ll run through some of the things that businesses must avoid in order to successfully navigate the off-payroll reforms.
1. Enforcing PAYE only working
Some businesses have adopted a risk-averse approach to the changes, opting to enforce contractor bans as a workaround to IR35 reform. However, given the vast majority of contractors (91% according to the Qdos Status Review facility) belong outside IR35, insisting that contractors work PAYE will not only increase the likelihood of contractor walkouts, but also see hiring businesses pay up to 25% more per individual engaged.
2. Blanket IR35 determinations
Placing all contractors inside IR35 irrespective of an individual’s actual status is non-compliant. Described as a ‘blanket IR35 determination’, this strategy poses a considerable risk to businesses that enforce it.
This approach doesn’t take into account ‘reasonable care’, which must be met when carrying out an IR35 determination. As a result, firms that apply blanket assessments will take on the fee-payer’s responsibilities (deducting tax on an inside IR35 engagement) and also shoulder the IR35 liability.
Not forgetting that contractors are aware and wary of this strategy and are likely to either demand higher rates to compensate for PAYE tax or simply take on projects elsewhere.
3. Role-based IR35 decisions
Confusingly, while blanket IR35 decisions are not compliant, role-based IR35 assessments – which group multiple contractors with identical terms and conditions under one determination – are in keeping with the rules.
But even so, applying the same IR35 status to numerous contractors at once without expert support is a risk.
IR35 status determinations must assess the entire picture, including elements directly relevant to the worker and their business. With this in mind, a role-based assessment should only be used for indicative purposes, and followed by an assessment of the individual worker to ensure all aspects of IR35 are considered.
4. Relying on CEST
HMRC’s Check Employment Status for Tax tool (CEST) has been widely criticised since its hurried release before IR35 reform in the public sector in 2017. Ignoring key aspects of IR35 case law, relying heavily on other areas of the legislation and overturned in numerous IR35 tribunals, Qdos is not alone in its view that HMRC’s IR35 tool is fundamentally flawed.
Businesses are therefore advised not to rely on CEST when determining IR35 status, or at least have answers provided by the tool thoroughly checked by a trusted IR35 specialist.
5. Leaving contractors in the dark
Contractors who have not been informed of their client’s approach to IR35 reform only to receive an inside IR35 determination or an ultimatum (go PAYE or have your contract terminated) are likely to become disillusioned.
When it comes to IR35 compliance and minimising the potential for disruption, regular communication with contractors is crucial.
6. In fact, leaving any stakeholder uninformed
Building on the previous point, hiring businesses and, when involved, recruiters, mustn’t overlook the importance of transparency among all stakeholders – from contractors to key decision makers, department managers and even marketing and communications teams.
With a clear and transparent approach to IR35 reform that all stakeholders buy into, a business will be better placed to successfully implement the changes.
7. Ignoring IR35 reform altogether
Firms that engage contractors but choose to do nothing about IR35 reform will find themselves non-compliant come 6th April. The same goes for companies that only start assessing existing contractors when the changes come into effect.
By 6th April, all contractors currently engaged need to have been issued with a Status Determination Statement that outlines their deemed IR35 status and the factors that contributed towards this decision.
For more information on ways businesses should manage IR35 reform and to hear how Qdos can support with your IR35 compliance, please email our IR35 experts on [email protected] or call 0116 478 3390.