IR35 reform can be an intimidating piece of legislation
IR35 can be an intimidating piece of legislation to wrap your head around. While IR35 itself has been in effect for some time, since 2000 in fact, the (delayed) April 2021 private sector reform brings changes that contractors, recruiters and end-clients alike are, understandably, apprehensive about.
It’s easy to see why many limited company contractors feel that their livelihoods are in danger. It’s up to you, as the recruiter or end-client, to maintain communication and transparency throughout the supply chain; this is absolutely key to ensuring contracting remains a viable option for highly skilled workers and businesses like yours post-April 2021.
So how can a contractor stay outside IR35?
The main change being made to IR35 – otherwise known as the ‘off-payroll rules’ – is a shift in where the tax liability lies. While it used to be the contractor’s responsibility to make their own IR35 determination, as of April 2021 it’ll now be up to the fee-payer to make that decision, as well as calculate and pay any deemed income tax and NICs necessary.
The IR35 reform also introduces a new power that allows HMRC to collect any tax that goes unpaid by the fee-payer from other parties in the supply chain, which will apply to all contracts in the public sector and engagements with medium and large companies in the private sector from April 2021. For example, if the end-client (should they be the fee-payer) fails to make the correct income tax and NI deductions on behalf of a caught contractor, HMRC could demand that owed amount from the recruiter instead.
Lastly, while not a part of the IR35 legislation but certainly influenced by it, you should be aware of the Key Information Documents and what they mean for everyone in the supply chain. These documents will mean that recruiters have to supply key information about the business relationship between the contractor, agency, and end-client before a contract is signed.
The short answer to this question is any medium to large private sector business that engages contractors, any contractors that are engaged by such a business or any recruiters involved in placing said contractors.
Unfortunately in the run up to the changes, blanket determinations seem to be the order of the day for large corporates. There are many reasons why taking this route isn’t as risk-averse as it may seem, and it’s in your best interest as either a recruiter or end-client to retain a contractor workforce.
It’s a sticky situation for many, and it’s often unclear on what the best way to proceed is. However, you have a responsibility to your engaged contractors to ensure a fair, considered status determination is given.
Make sure you take reasonable care in assessing current arrangements for each client, have open discussions with your contractors and other facets of the supply chain about IR35, put determination and communication processes in place for future engagements, and ensure that your team is up to date with the legislation and can offer accurate advice to worried clients.
If you’re an end-client, you should also identify a set person within your company to make status determinations and decide how payments should be made to contractors found inside IR35. Additionally, it may be a good idea to assess any complex labour supply chains that could prove risky, the potential financial impact of IR35 on your company, and review internal systems like payroll software, process maps and HR policies to make sure they’ll be compliant come April 2020.
Make sure that both you and your contractors are well-versed on what IR35 status is measured against. You should be aware, be able to advise on, and be able to apply the following to both the contracts you supply or agree to and your contractors’ working practices.
Is it you, or is it the contractor, that controls the work? If you, as the client or recruiter, has a say in certain aspects of a contractor’s working life, you could be viewed as more of an employer – placing the contractor inside IR35. Provided deadlines are met, genuine contractors should have the freedom to complete their deliverables without being managed.
Right to Substitution
If you hired a plumber, would you care if the exact plumber you’d spoken to completed the job, or would you be happy with any qualified plumber carrying out the work? The general consensus is that as long as the job gets done, it doesn’t matter who does it. That is the right to substitution, which has long been seen as pivotal when demonstrating that a contractor is outside IR35.
Mutuality of Obligation (or MOO)
Do you expect your contractors to consistently provide their services? Are they free to decline work from you? If there’s an ongoing obligation to provide or produce work from either side, that’s mutuality of obligation (MOO). Work should be provided and accepted on a project basis, as opposed to rolling tasks.
You should also make sure that your contractors get a professional, unbiased contract and working practices review. It’s the working practices review that’s key; while contract reviews are a great indicator as to a contractor’s IR35 status and can be used in a tribunal as evidence, it’s the working practices that HMRC will scrutinise should they undergo an enquiry. Make sure you amend any contracts and working practices to be brought in line with feedback from an IR35 consultant.