When is a contractor not a contractor? From April 2021, it appears, when the updated IR35 rules come into force and change the framework for contractors working in the private sector.
The IR35 changes are aimed at workers who traditionally bill through their own personal service company (or other third-party ‘umbrella’ companies). In many cases, tax payments and National Insurance Contributions (NIC) will become the responsibility of the end client, for large or medium-sized businesses, and added costs may affect departments throughout the business.
The task of determining a worker’s employment status will also fall on the end client. If handled poorly, this may have significant financial and reputational implications for a company.
IR35 has caused alarm among some businesses, which are now faced with the task of determining the employment status of a significant proportion of their workforce. For the CEO, it’s difficult to get that information, and to work out the impact this will have and the risks to their business.
But gaining central oversight of who is in the business at any one time and preparing in advance will be crucial to avoiding any liabilities. It may increase your costs in the short term, but doing a risk assessment of the business around IR35 will allow you to make better-informed decisions.
The IR35 changes may also have other implications, including a loss of off-payroll talent. When the rule changes came into the public sector, for example, certain organisations tried to adopt a blanket approach and re-categorise everyone as employed. A lot of IR35 contractors left for the private sector because they didn't want to work in that way.
Private sector businesses that have learned from the mistakes of counterparts in the public sector are well placed to take advantage of the opportunity IR35 presents. The changes are a chance to examine your workforce and identify whether you have the right skills in your business, for now and the future, an exercise that is now particularly important for a post-pandemic environment.
We've compiled five actions CEOs can take now to prepare their businesses for the new legislation and to help offset any additional costs.
1 Educate internal stakeholders who engage contractors
2 Consider hosting a facilitated workshop containing a mix of technical guidelines, discussion and group input
3 Use data analytics to identify the population of off-payroll workers in your organisation
4 Assess the employment status of your workers before 6 April 2021 to identify the impact on your business – our online assessment tool can help with this
5 Communicate details of the actions required by affected stakeholders
The HMRC ‘Check Employment Status for Tax’ tool (CEST) has been dogged by criticism of its limitations. In order to help businesses navigate IR35 and prepare for legislative changes around off-payroll working, we've developed an alternative, more comprehensive tool to assess a worker's employment status.
The Employment Status Intelligence Platform (ESIP) provides both a decision and a risk rating flag that highlights the potential for challenge to the status decision. It also provides a database to store and monitor the status of the new and existing off-payroll worker (OPW) population. And it sends notifications for periodic reassessment of each OPW while they continue to be engaged. When an OPW is deemed to be employed, the tool can be configured to provide practical guidance, including the agreed payroll operation and dispute resolution process.
With three months to go until the legislation comes into force, it is crucial that preparations are underway now. Increasing focus on this area by HMRC is putting pressure on businesses that engage contractors. The new rules can be difficult to navigate for businesses and many are yet to engage with IR35, but leaving it too late could be costly.
IR35 presents an opportunity for organisations to address their wider resourcing strategy to find the most effective and efficient way to create value from their people. Automating processes allows businesses to focus on other value-add activities, while offering peace of mind that risk in this area is managed.
Our experience with IR35 in the public sector shows that blanket approaches to the legislation change in April 2017 resulted in significantly increased costs of engagement and reduction of supply chain, particularly in areas such as IT and finance, where workers prefer to operate as freelance consultants.
We can support you to manage the change effectively and fully assess the impact of the new rules on your business.