Many companies in a multitude of industries rely on off-payroll workforces. Using contractors, consultants and freelancers gives businesses much needed flexibility and agility, especially during times when it doesn’t always make sense to take on additional full-time employees. Perhaps you need to quickly bring in more resource during a busy period, or maybe you need a specific skill set for a certain business challenge or project. It’s a growing trend, but worryingly, changes to off-payroll tax rules, which have already caused widespread chaos for contractors and their employees across the public sector, are now coming to the private sector.
How will IR35 impact companies and contractors?
Figures from the Office for National Statistics show that the number of self-employed workers in the UK has been on the rise since 2001. Today, they account for approximately 15% of the country’s working population and growing.
Yet in 2017, the government targeted this segment by overhauling how contract workers for public sector firms are taxed, threatening livelihoods and increasing the tax burden for HR departments, recruitment agencies and contractors.
Organisations from the NHSÂ to the BBCÂ have already been hugely affected by the IR35 reforms, which shifts the liability for defining a worker as employed or self-employed from the contractor to the employer. The government’s aim is to crack down on so-called “disguised employment”, where a company uses contractors who work through their own limited companies or umbrella organisations and operate in the same way as employees but pay less tax. However, the repercussions have been far more serious. Worried about getting the rules wrong, many organisations have decided to automatically class contractors as falling within IR35, making them pay more tax, while others have had to force contractors to become permanent employees or laid them off.
Now these IR35 rules are being extended to the private sector, coming into effect from April 2020. Large and medium-sized organisations including media firms, employment agencies, consultancies, building firms, hospitality businesses, engineering firms, training providers and financial businesses all stand to be affected.
Some companies have already taken steps to prepare themselves for the imminent changes, and with good reason. If they fall foul of the rules, they will be liable for paying back taxes and fines amounting to tens if not hundreds of thousands of pounds. Firms like HSBC have taken more drastic measures and confirmed they will no longer engage limited company contractors.
But there are other options that don’t involve inadvertently losing highly skilled contractors to competitors.
How to check whether contractors fall in or outside of IR35
First and foremost, companies should try to familiarise themselves with the new IR35 rules and study all existing contracts. Conduct a full review of all staff and contractors currently working with you and aim to identify which will be bound by the new rules.
When looking at the employment status of each worker you will need to consider:
- What are the worker’s responsibilities?
- Who controls the individual? Do you stipulate when, where and how they work?
- How are they paid?
There are tools like HMRC’s Check Employment Status for Tax (CEST), designed to helped businesses decide if a worker falls inside or outside the scope of IR35. However, the government has openly admitted that CEST is flawed and experts have called for it to be reviewed. If in doubt, seek professional advice by taking a look at Larsen Howie’s IR35 contract reviews range and also see our expert IR35 advice.
It’s importance to get it right. If you incorrectly class a contractor as falling outside of the IR35 rules, yet they are found to be an employee for tax purposes, your company will be fully liable for tax back payments as well as fines for late payment. At the same time, companies that incorrectly classify contractors whose working arrangements genuinely fall outside IR35 will find themselves paying unnecessary employers’ national insurance contributions.
Steps you can take to cover yourself
The good news is that companies and contractors can insure themselves against the risk of HMRC fines and litigation if they are found to be non-compliant.
IR35 Tax Investigation and Liabilities Insurance covers the cost of professional representation for both the defence and pursuit of HMRC enquiries as well as any back tax, interest and penalties applied by HMRC at the conclusions of their investigation.
What to do in the event of an HMRC investigation
HMRC may have limited resources so the chances of being investigated are slim. But don’t count on this. HMRC can open an enquiry with no reason and regularly carry out random checks.
If your company finds itself the subject of an HMRC investigation, don’t panic. HMRC conducts hundreds of IR35 tax investigations a year and many result in no action. High-profile cases such as those of TV presenters Lorraine Kelly and Kaye Adams demonstrate that HMRC can be defeated. But others like BBC presenter Christa Ackroyd haven’t been so lucky. Now the presenter is appealing the decision and the BBC could be held liable.
It is not usually a good idea to try and manage an IR35 investigation yourself. Contact professionals who are experienced in dealing with IR35 cases such as your business accountants and, if you have cover in place, your tax enquiry investigation insurance provider. Ensure all worker contracts, arrangement forms and communication with contractors is up-to-date and accessible. Importantly, remain prepared and organised.
Your business need not necessarily change the way it uses off-payroll workers, but it is key to undertake a risk assessment to determine how IR35 changes may affect your organisation. And now is the time to do it.
Speak to Larsen Howie today to understand your IR35 insurance needs and find out more about how to protect your business in case of an IR35 investigation. You can also read the latest IR35 updates in our Knowledge Hub.
