The government has recently published a consultation paper with its proposals to extend off-payroll working rules to the private sector. Employers will need to take “reasonable care” that they have assessed employees’ tax status, but what does that mean? Joe Tully explains.
Over the past few weeks, since the government published its policy paper “Off-payroll working rules from April 2020”, you may have been wondering what the IR35 reforms will mean for you. The consultation suggests that HM Revenue & Customs is pressing on with these changes in the private sector regardless of response, so HR needs to get IR35-ready.
IR35 in the private sector
HMRC reveals private-sector off-payroll working changes
The off-payroll working rules – commonly known as IR35 – are intended to ensure that individuals who work like employees pay broadly the same employment taxes as employees, regardless of the structure they work through.
They apply where an individual worker provides their services through an intermediary such as a personal service company (PSC).
IR35 was initially introduced in 2000 but from April 2017, within the public sector, the obligation to determine tax status and the associated tax risk moved from the worker to the hirer and fee payer (usually the supplying agency).
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From April 2020, medium and large-sized businesses in the private sector will also be required to assess their flexible workforce and take “reasonable care” to determine each individual’s correct tax status.
While the government has confirmed that this obligation will not apply to small companies, it will have a sizable impact on medium and large-sized businesses – leading, inevitably, to an extra workload for HR professionals to ensure compliance by April 2020.
What does ‘reasonable care’ mean?
One of the most important parts of the legislation is the requirement for hirers to show ‘reasonable care’ when making status determinations.
This test is key for a hirer: if you can demonstrate that you have taken reasonable care, you should have no tax risk; if you cannot demonstrate this, you risk a tax bill for those contractors incorrectly assessed.
HMRC has given very little actual guidance in terms of applying it to IR35 but it did issue some instructions in February 2018 about what reasonable care means for tax affairs in general. In the guidance, HMRC defines reasonable care as “doing everything you can to make sure the … documents you send to HMRC are accurate”. It also states that it will take “individual circumstances into account when considering whether you’ve taken reasonable care”.
The sense we have from HMRC is that it will set the standard appropriate to the entity it is testing. In the case of a medium or large-sized business, especially those with a HR department, we anticipate that HMRC will expect a thoroughness and diligence commensurate with the size of the business.
In the latest consultation, HMRC suggests it will require a hirer to be able to provide reasons for its IR35 status determinations. Businesses will be required to set up a process to allow for these decisions to be challenged by the contractor.
When IR35 was implemented in the public sector, there was lots of bad practice, including blanket bans of contractors, which would fail the reasonable care standard. Establishing a fair disagreement process is another important priority for HR teams this year.
Why does it matter?
The stakes are high. HMRC will investigate employers to see if they have fulfilled their obligations and met the reasonable care test. As well as the compliance and commercial imperatives to get processes in place, and avoid unexpected tax bills, it is vital you don’t alienate your flexible workforce and risk your valuable talent fleeing to competitors.
Now is the time to take the right steps to get ready and avoid any last minute panic or the incorrect classification of contractors.
It is also important to note that the liability for non-compliance will rest with the party that has failed to meet its responsibilities – the liability will move down the labour supply chain as each party fulfils its obligations. This will increase the risk on everyone in the supply chain. No one will be able to wash their hands of the issue and assume it is someone else’s problem.
What should we do now?
You should undertake a workplace audit to establish the nature of the working practices of each contractor. By undertaking this exercise, you may find that your exposure to IR35 is limited.
Contractors have justified fears about the changes, so now is a good time to provide reassurance and information about how you will ensure reasonable care is taken with status decisions.
It can be complex to discern where workers fall in terms of IR35 and that’s where you may benefit from enlisting the support of an external advice to help you and provide bespoke guidance.
There has also been heavy criticism of HMRC’s Check Employment Status for Tax (CEST) tool – according to contractor body APSCO, 43% of its members felt that the tool did not produce reasonable status decisions in light of the factual realities of placements.
HR teams and businesses need to be wary of trying to seek easy automated answers when it comes to assessing status decisions. In many cases, there will be no simple yes or no answers.
This is one instance where the ‘computer says no’ could have serious repercussions. IR35 is landing very much at the feet of HR and there is a big opportunity to demonstrate leadership and commitment to IR35 best practice.