The UK economy is increasingly reliant on contractors – self-employment has grown from 3.3m in 2001 to 4.8m in 2018– so it’s no wonder that the government is looking to review IR35, which has been in existence since 2000, to make sure that self-employed contractors pay the correct income tax and national insurance.
Some of the statistics that we hear about are very misleading. There is a lot of talk about how much additional tax the changes are likely to bring, but these focus on PAYE and national insurance. Little or no thought has been applied to lost corporation tax or the slow-down in business growth from an inability to maintain a flexible work force.
The recent consultation is designed to help shift the responsibility to determine tax status and associated risks from the self-employed worker to the hirer. This has been in place in the public sector for over two years, but now the focus is switching to medium and large-sized businesses who will have to comply by April 2020. Companies hiring self-employed workers will be required to take “reasonable care” when assessing roles.
So what can you do as a company to help yourself ahead of these changes:
1. Learn more about IR35
Nothing focuses the mind more than an unexpected tax bill, so don’t be vulnerable to it. Understand the new rules and how they might affect you and don’t miss out by being mis-informed when you are competing for much needed contractor talent – especially in the IT sector. Get ahead of the reforms by moving it right up the agenda and setting up groups of specialists with just that brief. A cross-functional working group – HR, finance and procurement – could make good progress towards 2020 by looking at implications, reviewing internal processes and talking to industry peers.
2. Don’t make the same mistakes as the public sector
There is definitely an opportunity for the private sector to get this right and learn from the mistakes of two years ago. Then, some public sector organisations incorrectly classified contractors as inside IR35, insisting the move to PAYE, or just banned contractors operating through personal service companies (which is the group that IR35 targets).
3. Review your contractor community
Look closely at your existing contractor workforce and establish the nature of the contract and working practices of each contractor. Most companies find some contractors working outside IR35, some within it and a pool of people who are somewhere in the middle. You can help them keep their contractor status through changes to their working practices. Be vigilant and thorough.
4. Work closely with recruiters
Make sure that people who supply labour to you properly understand the coming changes and realise that from April 2020 liability for non- compliance will shift down the labour supply chain and rest with the party that has failed to fulfil its obligations. This is a serious increase in risk for everyone in the supply chain and why it is really important to put a best practice approach in place this year with them.
5. Get specialist advice if you need it
It can be a complicated matter discerning where workers fall in terms of IR35 so you may need the support of an external legal IR35 partner to help you comply with the new regulatory framework. If you can establish a robust set of new policies in the next 12 months, you will avoid the confusion experienced by the public sector – we can and should do better this time.
6. Reassure your contractor pool
By talking and communicating regularly on the topic you will keep conflict and confusion to a minimum. Contractors will naturally have many concerns e.g. switching to PAYE could reduce take home pay so this is an emotive subject. Make sure they are included in discussions and get the message across that you are taking the proposed reforms seriously. They will be looking for reassurance that you will take ‘reasonable care’ and will not be looking to impose blanket assessments, or that – worse-case scenario – the change will bring an end to a flexible workforce. Show you are committed to fulfilling your obligations to contractors outside IR35 – no need to fear the rules – and that things can be done for those inside IR35 who still want to remain as contractors to help them stay outside of IR35 and maintain their self-employed status.
For some businesses the prospect of losing a skilled contractor community by mishandling the IR35 changes is a serious risk and HMRC has been crystal clear in its call for companies to step up their game. Get it wrong and there could be a real possibility that workers could be alienated or driven away. Responding quickly and robustly is the key to least disruption.