Have organisations that have sought to be compliant with IR35 reforms been wasting their time? Matt Fryer looks at what the changes from April 2023 mean for HR.
The government’s sudden repeal of the IR35 changes, introduced to the public sector in 2017 and the private sector in 2021, has come as a surprise to all in HR and recruitment.
Despite the time and expense that organisations have invested in managing these changes, the U-turn has largely been welcomed by HR, procurement and legal teams. It will remove a significant burden of compliance and risk of tax liabilities from organisations that wish to engage contractors. This should help to unlock the potential of flexible workforces at a time of increasing demand for skilled temporary workers, particularly in industries such as IT, engineering, energy and healthcare.
It does not, however, remove all risk from resourcing contingent workers and it is important to understand exactly what responsibilities HR teams and their recruitment agencies still hold.
How is IR35 changing?
It is important to note that the IR35 rules still exist, all that is changing is that it will become the responsibility of the director of a personal service company (PSC) to assess their own IR35 status on an assignment-by-assignment basis and to ensure that the correct amounts of tax and national insurance contribution (NIC) are paid.
IR35 reforms repeal
With regards to sole traders or contractors who do not work through a corporate entity, it should be noted that the employment and tax status obligations has not changed and the organisation using their services should continue to review their tax status. Failure to do so could leave the organisation exposed to liabilities for taxes, penalties and interest, as well as employment rights such as holiday pay, unfair dismissal and access to an auto-enrolment pension scheme.
When is IR35 changing?
The change will come into effect on 6 April 2023. Although no further details have been published, a cautious approach would be to expect the change to relate to payments for work done after that date. The current rules will remain in place until then, so it is important that organisations continue to manage their IR35 risks appropriately between now and April 2023.
We would expect HMRC to police the IR35 rules more vehemently than they have done previously. Given HMRC has up to four years to open an enquiry into a tax position, it is recommended that HR teams document the processes undertaken up until this date to ensure they have a “reasonable care” pack ready, should HMRC make an enquiry.
Wasted time on IR35 compliance?
While many will be frustrated at the time and energy that has been spent on adapting to the new rules, these efforts have not been entirely wasted. Hiring businesses now have a greater visibility of their flexible supply chain, allowing them to better monitor and control costs and legal compliance.
It is not yet understood what the finer details will look like or require, but the chancellor has said compliance with all tax legislation will remain under review. In this regard, the Criminal Finances Act 2017 imposes obligations on organisations to ensure that their supply chain operates in a tax compliant manner.
If HR teams keep up with the process and practices they have implemented, they can use this visibility continue to pay close attention to their suppliers’ employment and payroll compliance.
Support for contractors
We expect agencies and hirers to receive queries from workers on whether they can switch to working outside IR35 via a PSC – and thus increase their take home pay – or asking for advice on the pros and cons of different ways of working.
If HR teams keep up with the process and practices they have implemented, they can use this visibility continue to pay close attention to their suppliers’ employment and payroll compliance.”
It shouldn’t be forgotten that end clients’ and recruiters have a huge part to play in contractors’ IR35 status, as the type of role they are doing and the way they are treated, will ultimately determine the IR35 outcome of the engagement. We may see more end hirers being asked to input into IR35 assessments for contractors moving forward, as contractors seek additional comfort that the hirer is aligned with the IR35 status being applied. Maintaining the knowledge of hiring managers will be useful to support them in this process.
Going forward, HR should consider what support would be appropriate for hiring managers when working with contractors to maintain a non-employed relationship, and what support the organisation would be willing to offer off-payroll workers post April 2023 to assist them in determining their employment status for tax.
Organisations that support contractors with tax status determinations for projects are likely to be valued in this competitive job market. Where HR teams have embedded IR35 into day-to-day engagement processes, companies will be in a great position to continue to attract the best contractor talent on an outside IR35 basis moving forward.
Could the current rules be reintroduced?
The reason these changes were introduced was HMRC’s view that there was widescale non-compliance in the contractor market. Should widespread abuse of these rules occur, the government could decide to revert to the existing rules (where the end client again becomes responsible for undertaking IR35 assessments and ensuring the correct tax is paid). So, in the long run, it benefits everyone to ensure compliance.
We currently have very little information from HMRC and the government regarding the implementation of these changes, but do expect further information to be published.
In the meantime, it is important to remember that the repeal does not happen until April 2023, so HR teams must continue to ensure that their businesses and suppliers are compliant with the current rules.