With IR35 reforms being applied to private sector organisations from 6th April 2021, here we look at ways clients/engagers can prepare their businesses in advance of the implementation date.
To prevent apparent non-compliance with the existing IR35 legislation, the ‘off-payroll’ IR35 rules were applied to all public sector organisations in April 2017. As a result, clients are now responsible for determining the IR35 status of contractors, and deducting income taxes (where appropriate) from those caught by the rules.
Despite widespread doubts over the effectiveness of the off-payroll rules, particularly in the way they operate in practice, the rules will be rolled out to most private sector businesses from April 2021 onwards.
And they are manageable, explains IR35 status advisory, Qdos, who provided the following steps to help clients prepare in advance.
Avoid relying solely on CEST
Much has been made of CEST – HMRC’s controversial IR35 tool – and there are a number of reasons we advise engagers not to rely solely on the technology when determining a contractor’s status.
In addition to the fact the tool assumes that Mutuality of Obligation (MoO) exists in all engagements, the technology cannot provide an answer in every case. After a thorough examination, it was also found the tool delivered the accurate answer in less than half of the cases that were passed through it.
The lack of information the tool requires to provide an answer, compared to an in-depth IR35 contract review, for example, means relying on it will actually expose an engager to more risk.
In addition to this, recent Qdos research also shows that only 23% of contractors will work with a client or through an agency that uses CEST to determine IR35 status.
Engagers should bear in mind that the use of CEST is not mandatory, and independent assessments – which will provide a far more substantive audit trail – are allowed. Find out more about CEST (and its flaws) here.
Involve contractors (and all parties) in IR35 decisions
CEST, for example, doesn’t require any input from a contractor when deciding whether an engagement belongs inside or outside IR35. We urge engagers to collaborate with contractors and when involved, agencies, when setting IR35 status.
Joined up thinking is needed when setting IR35 status accurately. In our expert opinion, you cannot make well-informed status decisions without the input of each party in the supply chain.
Do not make blanket or role-based assessments
IR35 decisions must be made with ‘reasonable care’. This means blanket assessments, for example, are non-compliant. Unsurprisingly, engagers that carry out blanket IR35 determinations will also struggle to attract contractors in future.
On the other hand, role-based assessments are, according to HMRC, compliant. But it would be short-sighted of an engager to assume that all contractors belong inside or outside IR35 purely because of their role. With this in mind, we also recommend that engagers avoid role-based IR35 decisions.
Role-based assessments, much like blanket decisions, do not take into account the individual and unique details of a contractor’s working arrangement and therefore increase the risk of engagers setting status incorrectly.
Allocate the right resources
The medium and large companies that will soon be tasked with making IR35 decisions must take their responsibilities seriously and set aside the necessary resources. Many of these companies engage thousands of contractors, and so it is vital they make sure they are equipped with the skills and expertise they need to make correct decisions consistently on what can be a huge scale.
Start preparations now
IR35 reform in the private sector is just months away. Therefore, for firms to successfully implement the changes and retain contractors, the work must start now, explained Qdos CEO, Seb Maley:
“While the clock is ticking towards IR35 reform in the private sector, there is still time to prepare.
“By taking the appropriate steps and putting processes in place to ensure they are capable of making accurate IR35 decisions on a case-by-case basis, private sector companies can protect their liability.
“In doing so, they will also be in a position to continue engaging contractors outside IR35 – something that remains vitally important to these workers.”
For further reading, try practical advice for contractors in advance of April 2021, and IR35 private sector reforms – what happens now?