Off-payroll labour and IR35 – six months on but uncertainty remains for end clients, recruiters and contractors
More than half of the UK’s small and medium-sized enterprises (SMEs) have not put in a formal process to adhere to changes to the IR35 rules, according to a report.
The revelation comes following a survey taken by advisory firm BDO, which found 55% of SMEs using contract workers say they will worry about IR35 reforms once businesses return to more normal trading following the COVID pandemic.
Yet those companies that did make broad-brush decisions now have regrets over how they handledIR35, namely if they made blanket bans, as The Freelance Informer (TFI) previously reported: Half of companies have regrets over IR35 decisions and blanket bans – Freelance Informer
It will shortly be six months since the IR35 reforms became effective for private sector entities, and there are many diverging views on whether the government has achieved its objective in creating a level playing field for employed and self-employed workers. But there have been some clear trends, says BDO.
Marketed “solutions” – buyer beware
Despite the government’s best intentions, the introduction of the IR35 private sector reforms has seen an increase in the marketing of “alternative models” and so-called IR35 “solutions”, such as ‘mini-umbrella companies’ and conversion to ‘statements of work’ that purport to reduce tax and NIC payable and avoid the obligations of the IR35 reforms. As always, the risk with such ‘one size fits all’ approaches is that they do not reflect the reality of the relationship between the engager and the worker.
“Great care needs to be taken by organisations that use off-payroll labour to ensure they are fully meeting their compliance obligations, including IR35, PAYE and NIC and wider governance matters such as the Corporate Criminal Offence legislation and Senior Accounting Officer rules,” says BDO in a report.
“The safest approach is always to make sure you check the IR35 position each time a worker is engaged (even on repeat contracts) to make sure you remain compliant,” suggests the advisory firm.
HMRC’s approach to enforcement
Although HMRC has stated it is taking a ‘soft landing’ approach for IR35 in the private sector, that certainly doesn’t mean a lack of action.
“Off-payroll engagement in the worker supply chain remains very much at the forefront of HMRC’s areas of focus,” says BDO, “and we expect that compliance activity in the private sector will increase significantly over the next 18 months.”
BDO explains HMRC’s approach as a “conveyor belt of key employment tax cases before tax and employment tribunals and higher courts.”
The outcome of these cases has a direct evolutionary impact on the way in which employment status issues, including IR35 status determinations, need to be assessed. In other words, your decision last year might not be valid next year!
Contractors, how are your SME clients handling IR35?
Start a discussion in the comments section.
Supply chain clarity?
Notwithstanding the complexities in assessing IR35 and the need to ensure judgements in tribunals are taken into account, it can be practically difficult to ascertain if there is a PSC in the supply chain where there are additional intermediaries (e.g. agencies) present in the supply chain, particularly with multiple parties involved.
HMRC expects engagers to have undertaken appropriate due diligence on their labour supply chain, and a lack of knowledge is unlikely to be a good defence if PAYE and NIC liabilities arise.
The key message is not to assume that any actions taken in advance of April 2021 will be automatically accepted by HMRC, contractors or even the courts.
HMRC announced a soft landing for IR35 in the private sector so employers should use this time wisely to sense check that their processes and procedures are still fit for purpose, working as planned and capable of standing up to HMRC scrutiny.
“Action taken now should save significant disruption and liabilities down the line,” says BDO.
