Guest post by Paul Mason, National Account Manager at Abbey Tax
IR35 changes affecting off payroll workers in public sector have only been in force since April 2017. In the recent Budget, the Chancellor has announced that from April 2020, the same, or similar, regulations will apply to the private sector, and organisations engaging temporary resource could have a real administrative challenge on their hands.
IR35 – the key facts
Organisations have always needed temporary resource, but taking on additional head count can be an issue. Many individuals wanted the flexibility (and earning power) from being able to freelance. Doing so through a limited company suited both parties and allowed the freelancer to maximise their tax position.
IR35 – or the Intermediaries Legislation to give it its full title – came into force in April 2000 to tackle disguised employment and specifically relates to contractors trading through Personal Service Companies (PSCs). IR35 enables HMRC to create a ‘hypothetical contract’, and to bypass the Intermediary (the PSC) and ask: “What would the relationship look like if the individual doing the work was actually engaged directly by the end client? Would it be one of employment or self employment?”
If HMRC could argue employment, then in simplistic terms, the PSC would have to apply PAYE to its earnings from that engagement. Determining the ‘IR35 status’ of an engagement was the PSCs decision and liability rested with the PSC.
Since April 2017 that has become the end client engager’s decision in the public sector. The October 2018 Budget Statement announcement means that from April 2020, it will be an issue for all medium sized and large organisations in the private sector.
Private sector organisations need to prepare for the changes now
Further consultation has been promised, so we don’t yet know the final picture. However, based on the public sector’s experience, any organisation in the private sector engaging temporary resource should be starting to plan now.
There are a number of key considerations for HR professionals in the private sector:
Understand the legislation
By fully understanding the legislation an organisation will be able to make decisions about the IR35 status of an engagement, and how the regulations apply to them, from a position of knowledge. If asked, those engaging temporary resource will need to give reasons for their decisions within 31 days.
Specialist knowledge or training
Determining status requires specialist knowledge. Do you have resource available that understands how to correctly implement the legislation? And do you have processes in place that look at contractual terms and working practices for every engagement?
Volume of work
Status reviews for organisations that engage large numbers of contractors will use up significant resource.Does your organisation have the time to undertake the reviews, perhaps twice ayear? And how will the business be affected if some contractors choose not to renew or accept engagements because their roles are deemed ‘caught by IR35’ and they face a larger tax bill?
Direct or through agencies
If your organisation is engaging contractors directly then you are not only the decision-maker, but also the fee-payer, and liable for any unpaid tax and NICs if the decision to pay a contractor’s company gross is found to be incorrect. And if you use agencies to recruit your temporary resource, do they understand IR35 and their responsibilities?
If you engage contractors directly, do you have measures in place to deal with an HMRC enquiry? This is a specialist area of tax, and insurance to protect against any liability can be invaluable.
IR35 will affect all private sector firms engaging temporary resource from April 2020, throwing up significant administrative challenges for many. Those who start the planning process now will give themselves a head start, so not only can they comply withthe new regulations when it arrives but also to ensure the right level of resource is place when it’s needed.