How does IR35 affect me and what are the risks?

With the amended IR35 legislation due to come into effect in April 2021, following a delay caused by the Coronavirus pandemic, many organisations are still experiencing some confusion over how the latest IR35 changes will affect them. This blog assumes you understand some of the background on IR35, it aims to clarify the latest position with respect to:

• Your obligations as a hirer
• The impacts on contractors
• The lessons learned from early adopters
• The risks to you as a hirer
• Actions you need to take now

Fortunately, there is still time to evaluate your position and take action. To discuss any of these topics in more detail and how they impact your organisation specifically, please get in touch with the team at Davies Resourcing. Alternatively, for more details on what IR35 is and how a contractor’s status can be determined, check out our separate blog on what you need to understand about IR35.

IR35 latest: your obligations as a hirer

The following is a simple breakdown of what you need to have in place:

1. You need to confirm whether the changes in legislation apply to your organisation, some smaller firms may not be impacted.
2. You will need a mechanism for assessing the status of each individual role that you use contractors for, on each individual assignment an individual undertakes in order to determine whether it falls ‘inside’ IR35, e.g. the relationship is equivalent to them being an employee.
3. You will need to provide a status determination to the party you contract with prior to the work starting, it would also be useful to be able to indicate whether work is inside or outside when a role is advertised as this may have a strong impact on the attractiveness of the opportunity.
4. Any contractor impacted by a status determination has a legal right to request the reasons behind the determination and to challenge them, even if they are not contracted directly with you. This is referred to as an ‘appeals process’ which you must be able to support.
5. Where the determination finds a role to be inside IR35 or where the hirer does not provide a determination or the reasons for its determination post an appeal, they become liable for any unpaid income tax and NICs due by the contractor.

Contracting under IR35

Contractors deemed to be inside IR35 are likely to be dismayed at the prospect of paying a larger percentage of their earnings in tax and may well push for increased rates of pay or look for an alternative assignment elsewhere.

As their employer, you are not obligated to pay them anything additional; however, you will want to engage with all of your existing contractors and understand how they are likely to respond.

In addition to the above, you will need to have a mechanism in place for ensuring that the contractors deemed to fall inside IR35 are paying the correct levels of tax and NIC. This will probably require you to recontract in a different way with existing contractors, potentially via a new third party such as an umbrella firm. This will require a considerable administrative effort prior to the new legislation coming into force as well as an additional ongoing audit requirement to ensure that umbrella firms are operating correctly.

The IR35 lessons learned from early adopters

The planned changes coming into force for private sector organisations were introduced into the public sector in 2017. Additionally, a good number of private sector firms, especially within the financial services sector chose to adopt the new working practices in April this year when the legislation was due to change.

In the public sector, many organisations reported significant project delays due to losing up to half of their contractor workforce, this was due to contractors migrating to private sector work to retain their rates, an option that will no longer be available.

Many of the early adopting private sector firms have not seen the same level of impact however, it should be recognised that labour market ambiguity, increased homeworking and reduced household spending over the pandemic period may have mitigated some of the impacts too.

There is also a disparity between roles with high demand, specialist skillsets seeing rates increasing to accommodate higher taxation whilst more commoditised skillsets such as work on PPI remediation programmes seeing little to no impact.

The risks to you as a hirer

The changes to IR35 legislation and the experiences of both the public sector and early adopters in the private sector highlight numerous risks that all hiring organisations must face. Failure to act could result in significant consequences including:

• Significant tax bills from HMRC
• Liability for taxes being passed up the supply chain
• The burden of dealing with determination appeals
• Fines/penalties for non-compliance
• Reputational damage for non-compliance
• Negative perspective amongst the contractor community
• Skills shortages and disruption to projects and operational performance

In addition to these known risks, there is a requirement to keep abreast of and understand any new challenges associated with:

• Brexit deal/no deal fallout and changes to legislation and regulations
• The shrinking economy caused by the pandemic

Actions you need to take now

• Map your workforce: understand your exposure to this risk in terms of the tax liability but also the likelihood of losing key people.
• Get hiring manager buy-in: your hiring community must understand the purpose of this legislation and the need to act and behave differently, this will help to prevent failings in your duty of care and the effort of having to rectify mistakes in the hiring process. It would be worth running a formal programme to get the right levels of commitment.
• Review and revise your recruitment, contracting and payment processes: ensure that you are able to accommodate and evidence the required changes without introducing too cumbersome a burden on your organisation.
• Engage with your supply chain: the IR35 changes will have a large impact on your relationships within the recruitment supply chain, especially as liability can be passed up the supply chain in cases of insolvency. You will need to have complete confidence that suppliers are fulfilling their obligations and that they work with you to mitigate any risks.
• Review working practices: when HMRC review employment status, they will do more than look at the scope of the contract they will review behaviours and how things work in practice. You must review all noncontractual practices such as email addresses, means of identification, communication etc to ensure you have mitigated any risks.

Get expert help

Davies works with over 750 Insurance, Financial Services and Regulated businesses and sources and deploys 1,000s of contractors. If you need help sourcing specialist skills or ensuring you are compliant with IR35 legislation, please get in touch.

From carrying out an end-to-end assessment of your readiness through to helping implement practical solutions such as helping automate and standardise your determination processes through to implementing new contracts and payment mechanisms, Davies is here to help.

We also have tried and tested umbrella partners that we work with on a regular basis to provide accurate and compliant payment solutions.