The Off-Payroll legislation comes into effect in the private sector in April. It will mean that the responsibility for assessing a contractor’s deemed employment status switches to the hirer, and that for contractors “Inside IR35” there are additional tax bills for all parties to pay. Firms that engage limited company contractors should be preparing now.
The challenge for hiring firms is how to navigate the new Off-Payroll world without exposing themselves to an excessive administrative burden, financial risk or additional costs of hire. A recent survey conducted by IR35 Shield amongst 3000+ contractors learned that 52% currently in work are yet to be assessed by their clients. There may be just weeks to go before the new tax rules take effect but those companies that implement a sound compliance strategy now will be able to continue to hire contractors with confidence.
Dave Chaplin, CEO of IR35 compliance solution IR35 Shield explains how.
Identify your limited company contractors
First, identify those contractors who require assessing under the Off-Payroll rules. Enlist your recruiters’ help to determine only the contractors engaged via a limited company whose contract goes beyond April.
Next, evaluate your workforce and group together contractors with similar working practices or contracts. Adopting a quality Off-Payroll compliance solution is crucial, as they will help identify engagements that pose an IR35 risk.
Using your adopted compliance solution, carry out an initial assessment of your contractors based on the information at hand – the contract and the working conditions. The result will be key in informing the next steps, and answering questions such as:
- What is the new total tax liability for ‘inside IR35’ contractors?
- What status factors are imposing risk upon the company?
- What projects are at most risk from the Off-Payroll rules?
You’ll have to identify those who need to be retained at all costs and prioritise these engagements.
Consider all scenarios
Having sought answers to the important questions and identified IR35 risk factors, you’ll be ready to establish a plan for your workforce going forward. You might find that certain policy changes to contractor working practices will help to mitigate IR35 risk effectively and mean some contractors can continue to genuinely operate ‘outside IR35’.
However, any changes made must be realistic, applied in practice and reflected in the contract. Any contracts containing clauses that are simply window dressing and not part of the true agreement between the parties could rightly be dismissed as a ‘sham’ if it proceeded to a tax tribunal.
For contractors that are “inside IR35”, further issues will need to be considered, namely:
- Which contractors will be difficult to retain on an ‘inside IR35’ basis?
- How much would it cost to retain key individuals?
The Off-Payroll rules unfortunately can cause some conflict, and some contractors may disagree, rightly or wrongly, with a deemed ‘inside IR35’ assessment and could decide to seek opportunities elsewhere. Contractors who have external legal opinions that their engagement is “outside IR35” will be concerned that remining on a contract assessed as “inside IR35” by the client could cause them problems with HMRC at a later date, so may choose to move on.
Key individuals could be retained if contract rates were to increase to counter their tax hit, which in turn may limit disruption to projects. Ultimately, a financial plan is required to weigh up the relative costs and prioritise expenditure to ensure the impact of Off-Payroll on projects is minimal. Many firms will try to ensure that their contract rates will not be increased when contractors are pushed on to payroll – but the free market will have other ideas. A two-tiered system of rates is already emerging.
Communication and continued compliance
Having conducted full IR35 status assessments, outcomes will need to be communicated and discussions had with contractors to establish the plans of those deemed within the scope of IR35.
Any rate renegotiations for affected contractors who plan on staying should be conducted at this stage, while those who are leaving will require termination notices. Many recommend that hirers engage ‘inside IR35’ contractors via agency payroll, who may decide to outsource this process. Those who are to be offered an alternative operating model will need to be served termination notices for their current contracts before switching. This needs to happen before March 2021.
And remember, Off-Payroll compliance is an ongoing process. Each contract renewal may warrant a new status assessment and monitoring of the workforce is required to ensure that working practices always reflect the written agreements and that the engagement has not moved “inside IR35”.
Insuring against tax risk
It is important to know that firms cannot insure against the non-payment of tax, in the same way that you cannot insure against a speeding fine. Those firms that are concerned about the possibility of being struck by the equivalent of tax lightning should at least cover themselves with tax investigation insurance to help cover the costs of defending a position against HMRC.
Different group of contractors will carry different levels of risk and exposure. This is like insuring a fleet of Ferraris versus a fleet of Minis and any insurance should be priced around the measured reality for each situation. A one size fits all approach doesn’t make commercial sense.
However, a note of caution, these types of insurance policies will rarely compensate where the claimant hasn’t fulfilled their own compliance obligations and neither will an insurance policy remedy the reputational damage that a firm suffers when being dragged through a tax tribunal. Any insurance product must be underpinned by a robust compliance process.
Agencies implementing IR35 compliance processes bundled with the promotion of tax loss products need to be very careful to ensure that they don’t accidentally fall foul of the Managed Service Companies legislation. The repercussions are drastic, and akin to all their contractors being found ‘inside IR35’, irrespective of the actual status in law, and debt transfer rules mean the agency and/or their directors can be liable for the unpaid tax.
Off-Payroll compliance is paramount
The coming weeks are critical for those companies that rely on contractors. Adopting a compliance-led approach is the only way to meet the reasonable care requirement and by taking a proactive approach firms will be able to hang on to their contingent workforce whilst minimising disruption to projects, mitigate against rising costs and keep their administrative burden at a minimum. Those firms which act now will reap the rewards.