By Dave Chaplin, CEO and founder of contracting authority ContractorCalculator and IR35 Shield, which provides expert contracting advice and information to contractors and the whole supply chain. Here he explains a four-stage, 12-step strategy to enable companies to achieve compliance.
April 06th 2021 is an important date in next year’s calendar. It is when the Off-Payroll legislation comes into effect in the private sector and the responsibility for assessing a contractor’s employment status switches to the hirer. The legislation will impose strict compliance requirements on end-clients and their recruitment partners and will prove crucial to a company’s continued engagement of contractors, who will naturally seek engagements where they can secure a fair and accurate IR35 status assessment, creating the opportunity for an ‘outside IR35’ contract.
A diligent, structured approach to compliance not only mitigates risk and appeases contractors, it also minimises the administrative and cost burden of complying with the rules.
Stage 1: Identify
Step 1: Collate
Only contractors trading via a limited company need to be considered under the Off-Payroll rules which could be a small portion of your contracting workforce. You need to find out so send a spreadsheet to your recruitment partners to complete, detailing the operating structure used by each contractor.
Step 2: Explore
Take stock of your flexible workforce and evaluate your contractors and group together those who have similar contract templates or working conditions. Your chosen Off-Payroll compliance solution or provider should help identify those who may pose a significant IR35 risk and so that you can address or change the working conditions in the pertinent cases to mitigate that risk across your workforce.
Step 3: Segment
Having assessed your contracting workforce accordingly, you will be well placed to know the size of the task in hand. For example, if the majority of contractors posing a high IR35 risk are engaged via umbrella companies, your compliance burden will be far smaller than if most operate via limited companies.
Step 4: Assess
The next step is to assess your affected contractors for IR35. An IR35 assessment requires the assistance of a compliance solution or provider, and needs to gather information from the contract paperwork, the working conditions and the contractor’s details. Ideally, you’ll want to address individual areas of the assessment to the relevant parties, to ensure accurate assessments while sharing the compliance workload.
Stage 2: Analyse
Step 5: Risk profiling
The Off-Payroll rules require hirers and their recruitment partners to police their contractor supply chains. This is due to the liability transfer provisions, which permit HMRC to pursue hirers and agencies for unpaid tax in the event that another intermediary has been non-compliant. Many tax avoidance schemes operate under the guise of ‘umbrella companies’, so beware of intermediaries whom market information suggests may be dodgy.
Step 6: Modelling
Conducting status assessments will help you to find answers to a number of critical questions, such as:
- What is the accumulative employment tax liability for ‘inside IR35’ contractors?
- What status factors are common across the firm, causing risk?
- What projects are at most risk?
Answering these questions will help inform a sound strategy to mitigate any damaging financial impact posed by the Off-Payroll rules.
Stage 3: Plan
Step 7: Engagement
The Off-Payroll rules will prompt many companies to review their engagement options. One reason is because direct engagement of contractors deemed ‘employed for tax purposes’ creates a heightened risk of employment rights claims. Clients may seek to insert intermediaries into the arrangement to mitigate this risk, at which point they will need to consider their chosen model of engagement.
Step 8: Policies
Having considered some of the previous steps, you will now be well placed to establish some policies for the supply and engagement of contractors in the future. For example, you might ask yourself:
- Should ‘inside IR35’ contractors be allowed to contract via limited companies?
- Should we restrict the umbrella providers that contractors can operate through?
Step 9: Finance
Having conducted some financial modelling, you will now be ready to establish a financial plan for your workforce. This might involve exploring potential legitimate policy changes in working practices to secure the ‘outside IR35’ status of contractors. Where this isn’t possible, depending on your budget, you may need to make some big decisions, such as:
- Which contractors will be difficult to retain ‘inside IR35’?
- How much would it cost to retain key individuals?
A financial plan will help you to prioritise expenditure to ensure that projects continue to run as smoothly as possible.
Stage 4: Implement
Step 10: Communication
Communication with contractors is critical. Speak to those deemed within the scope of IR35 to establish what their plans are. Making it clear that you have conducted a considered IR35 status assessment may mean that some are more inclined to continue working for you. In turn, their feedback will help you update and refine your strategy accordingly.
Those who are leaving will require termination notices. You will also need to serve termination notices to ‘inside IR35’ contractors who are staying, before offering them an alternative method of working. Also, make sure all outstanding invoices are paid. All of this needs to be achieved by the end of March 2021.
Step 11: Alignment
You must communicate policies established in step eight to your recruitment partners, as they will play a crucial role in implementing them. As well as explaining your plans, you will need to establish a deadline. We recommend allowing at least a month’s notice, to give recruiters time to notify suppliers that aren’t on your Preferred Supplier List (PSL).
Step 12: Monitor
Ongoing and regular monitoring of your workforce is key to compliance, to ensure that working practices continue to reflect the written agreement, negating any potential IR35 risk. Each contract renewal should be accompanied by a new status assessment. Similarly, keep an eye out for analysis of the latest IR35 court cases. Some may set future precedents impacting employment status case law, which could affect your current workforce.
The benefits of structured Off-Payroll compliance
Compliance with the Off-Payroll rules is not only a legislative requirement, but also key to the continued engagement of valuable contractors. Implementing these 12 steps will help ensure continued compliance with the Off-Payroll rules, while minimising the associated workload in the long-term.