Following the reform of the intermediaries’ legislation’ and introduction of IR35 in April 2017, all Public Sector employers have been responsible for determining the IR35 status for all their Contractors, regardless of if they are agency workers or self-employed.
If a contractor is deemed to be inside IR35 the organisation that pays the contractors limited company must deduct income tax and National Insurance as they would for employees.
Up until now, the Private Sector has adhered to the pre reformed legislation - the contractor has still been responsible for determining their own IR35 status. This is due to change in April 2020 bringing all employers, barring the Charity Sector and the smallest 1.5m businesses, into scope of the reformed Intermediaries Legislation. This has been a hot topic for business, the Government and staffing agencies, the draft bill has been published. However, with the Public Sector bringing in over £1bn a year for the Treasury, there will not be any further delay in rolling this out.
Given the very high standards parts of the private sector are subject to, such as the Code of Practice on Taxation for Banks, ensuring a robust, clear policy will be crucial to businesses. Our experience of the changes in the Public Sector have given us insight into the implementation to the wider business community.
We cannot stress enough, planning is essential as it will come as a huge shock to many.
So, what lessons have we learnt from the 2017 changes and how can we help our customers and contractors to transition to the new rules as smoothly as possible?
Plan, plan and plan some more: Frightened by the tax liability risk some of our customers took the decision of an “all in” policy, we would recommend that all roles within the business are reviewed to determine the status of the temporary appointment and that once a contractor is appointed, they are then assessed using the HMRC tool.”
A clear, robust policy will enable your hirers to make a decision on the IR35 status of the role the contractor is filling quickly and if a challenge is raised, enable them to respond to this with the evidence of the decision made.
Risk Assess: What are the risks to your business of these changes?
What other IR35 risks (e.g. tax risk, risk of increased contractor rates, reputational risks, the legal risks of a successful challenge by HMRC, the flight risk of contractors preferring to work elsewhere if inside IR35) of engaging limited company contractors? How will you determine whether or not IR35 applies to your contractors?
What tools will you use?
The Public Sector has seen an increase in costs for certain skill sets, but this could be argued to be due to contractors choosing to work in the Private Sector where the legislation is not yet in place.
We believe there could be two outcomes in April 2020, either costs will reduce as all businesses will be in scope of the rules, or costs will increase as Private Sector employers raise the base rates to the contractor to cover the extra tax burden.
According to the CIPD, 51% of public sector hiring managers had lost skilled contractors as a direct result of the changes to IR35 regulations and 52% had witnessed cost rises, delays and project cancellations.
Human Resources: This will all impact on your permanent workforce.
Procurement and legal teams will need to review existing or standard contracts for contractors. Payroll teams may need additional people to process the payments and make the deductions. Training will need to be given to all staff involved in the hiring and payment process to ensure the policy is adhered to.
The Legal Bit: To ensure compliance, determining IR35 status requires an analysis of the contractual terms of the engagement, the tasks the contractor will be carrying out and under whose supervision.
The contractor’s actual working practices will therefore need to adhere to these contractual terms.
For example, many roles within the Public Sector have been deemed to be in-scope of IR35, if you are a limited company contractor, working very much like a permanent employee of your hirer as opposed to having more of a business-to-business relationship, then you will need to pay taxes as does the permanent employee.
However, if the contractor is indeed working on a business-to-business relationship and is not working in a way similar to that of a permanent employee, this could be deemed out of scope. Any contract needs to ensure it sets out a clear and defined business-to-business relationship.
So, the key to managing the changes coming in April 2020?
Work Smarter; plan now, don’t wait until more guidance is published
Get a team together from all areas of your business to create the policy for all hirers, start training all people who will or could come into contact with this legislation, cross the “t’s” and dot the “i’s” and speak to those who have experience in dealing with the Public Sector implementation.
We are on hand to help.