Changes to off-payroll regulations were postponed in April as employers dealt with the early challenges of the pandemic. Organisations need to get their houses in order now if they are to avoid exposing themselves to additional risks and costs, says Dave Chaplin.
How contractor clients manage their contingent workforce in the build-up to the off-payroll, or IR35, rules that take effect in April 2021 will be crucial in defining how many contractors they are able to retain, and at what cost.
The extension of the rule changes to the private sector had initially been planned for April 2020, but was postponed due to the pandemic. Put simply, it pushes responsibility for determining a worker’s employment status (and therefore levels of tax and National Insurance contributions) onto the employer, where previously it had been down to the contractor themselves.
The challenge for hiring firms is to navigate the new off-payroll world without exposing themselves to an excessive administrative burden or financial risk.
Whereas the latter two factors have contributed to concerns of widespread abuse of the legislation, an approach to compliance that mitigates risk and appeases all parties isn’t difficult to achieve. If you’ve not yet started on your IR35 compliance journey, here are some steps to take.
Identify your limited company contractors
First, identify those contractors who require assessing under the off-payroll rules. Enlist any agencies you work with to help identify only the contractors engaged via a limited company whose contract goes beyond April.
Next, evaluate your workforce and group together contractors with similar working practices or contracts.
Ensure you do your due diligence on any off-payroll compliance solution or provider is crucial, as they will help identify engagements that pose an IR35 risk and can advise you on the practicalities of altering any working conditions to mitigate any risk across the workforce.
With a solution or strategy in place, carry out an initial assessment of your contractors based on the information at hand – the contract and the working conditions. The result will be key in informing the next steps, and answering questions such as:
- What is the accumulative employment tax liability for ‘inside IR35’ contractors (who must be considered as employees for tax purposes)?
- What status factors are imposing risk upon the company?
- What projects are at most risk from the off-payroll rules?
You’ll have to identify those who need to be retained at all costs and prioritise these engagements.
Consider all scenarios
Having sought answers to the important questions and identified IR35 risk factors, you’ll be ready to establish a plan for your workforce going forward.
You might find that certain policy changes to contractor working practices are enough to mitigate IR35 risk effectively and allow some contractors to operate outside IR35.
However, any changes made must be realistic, rigorously applied in practice and reflected in newly drafted contracts. Any contractual amendments that are simply window dressing and not part of the true agreement between the parties could rightly be dismissed by HMRC as a sham.
Where such amendments aren’t possible for contractors to achieve ‘outside IR35’ status, further issues will need to be considered, namely:
- Which contractors will be difficult to retain on an ‘inside IR35’ basis?
- How much would it cost to retain key individuals?
The off-payroll rules were always going to be a potential cause of conflict, and many contractors will either disagree with a deemed inside IR35 assessment or seek opportunities elsewhere.
Key individuals could still be retained if contract rates were to increase to counter their tax hit, which in turn would limit disruption to projects.
Ultimately, a financial plan is required to weigh up the relative costs and prioritise expenditure to ensure the impact of off-payroll on projects is minimal. Many firms believe that rates will not be increased when contractors are pushed on to payroll – but the free market will have other ideas.
Communication and continued compliance
Having conducted a full IR35 status assessment, which needs to factor in the contractor’s limited company business, outcomes will need to be communicated. This is crucial to establish the plans of those deemed within the scope of IR35.
It is important to know that firms cannot insure against the non-payment of tax, in the same way that you cannot insure against a speeding fine.”
Any rate renegotiations for affected contractors who plan on staying should be conducted at this stage, while those who are leaving will require termination notices. Many recommend that hirers engage inside IR35 contractors via agency payroll, who may decide to outsource this process.
Those who are to be offered an alternative operating model will need to be served termination notices for their current contracts before switching. This needs to happen before March 2021.
And remember, off-payroll compliance is an ongoing process. Each contract renewal warrants a new status assessment, and monitoring of the workforce is required to ensure that working practices always reflect the written agreements.
Insuring against tax risk
It is important to know that firms cannot insure against the non-payment of tax, in the same way that you cannot insure against a speeding fine.
Those firms that are concerned about the possibility of being struck by the equivalent of tax lightning should at least cover themselves with tax investigation insurance to help cover the costs of defending a position against HMRC.
Different group of contractors will carry different levels of risk and exposure. This is like insuring a fleet of Ferraris versus a fleet of Minis and any insurance should be priced around the measured reality for each situation. A one-size-fits-all approach doesn’t make commercial sense.
However, a note of caution, these types of insurance policies will rarely compensate where the claimant hasn’t fulfilled their own compliance obligations and neither will an insurance policy remedy the reputational damage that a firm suffers when being dragged through a tax tribunal. Any insurance product must be underpinned by a robust compliance process.
The coming weeks are critical for those companies that rely on contractors.
Adopting a compliance-led approach is the only way to meet the reasonable care requirement and by taking a proactive approach firms will be able to hang on to their contingent workforce while minimising disruption to projects, mitigate against rising costs and keep their administrative burden at a minimum. Those firms which act now will reap the rewards.