Mistakes to avoid when preparing for IR35 reform
A sea change in the contracting world will hit the private sector next April. Under new rules for administering the IR35 legislation, medium and large businesses in the private sector must take responsibility for setting the tax status of contractors. With agencies set to carry the liability when operating as the fee-payer in the engagement, recruiters are very much involved too.
Said quickly, IR35 reform doesn’t sound too radical, but given the difficulties the public sector faced when changes were introduced in 2017, there are a number of lessons that must be learned.
Don’t delay preparations
Don’t hope for a U-turn from HMRC. We can debate as much as we like whether these IR35 changes are the right course of action to stop what the Government sees as widespread non-compliance, but by the looks of things, it’s too late in the game. It seems very unlikely that HMRC will change its mind. And so like it or not, private sector businesses and agencies must start putting the processes – and the right mindset – in place to help them successfully manage changes.
Avoid blanket IR35 determinations
It’s important the private sector doesn’t make blanket IR35 decisions, which have been used too often in the public sector’s approach to reform.
Accurate IR35 decisions are typically made on a case-by-case basis. Each contractor should be individually assessed, because few contracts, in reality, are likely to be exactly the same.
HMRC itself advises against blanket decisions and yet it became widespread in the public sector. Not having the skills or the time to put into these assessments is likely to come back to haunt the engager. And from next April it will often be their liability if their decisions – if challenged – are proved wrong. Real care needs to be taken with IR35 assessments. There is, after all, a lot at stake.
Do not give contractors ultimatums
For agencies and engagers to offer contractors no option but to work inside IR35, through an umbrella, on payroll or not at all is a short-sighted move.
Independent professionals will simply look elsewhere, opting to work on projects where they can have their IR35 status assessed fairly. Needless to say, the companies that have come to rely on a highly skilled flexible workforce will lose out.
There are worrying signs that this trend is already underway. HSBC has reportedly told contractors working through personal service companies that after one further contract extension they will have to decide whether to become employees or have their contract terminated.
Don’t rely on CEST
It’s all too clear that despite promises made by HMRC to upgrade CEST in time for the introduction of private sector reform, not enough has been done yet. The software was never thought to be up to scratch for the public sector, and the improvements recommended by the HM Treasury’s Office of Tax Simplification last week do not solve these issues.
Recruitment agencies and private sector firms should remember that its use isn’t mandatory – independent IR35 assessments are allowed.
In fact, don’t rely wholly on HMRC
It must also be said that relying on HMRC’s guidance and support – beyond CEST – is also risky. The various disputes settled in court against HMRC have made clear there’s a question mark over whether the organisation itself fully understands the complexities of the IR35 legislation.
The attitude at HMRC seems to be that the recent substantial rise in tax revenues provides evidence of success with IR35 reform in the public sector. With this in mind, there’s little to suggest that HMRC will do much, if anything, differently in the private sector.
Don’t leave contractors in the dark
Expectation management would be a good thing right now. Agencies and medium and large private sector businesses should open up a dialogue with contractors. After the chaos in the public sector, these workers need some kind of reassurance.
The more contractors know about the process and the more involved they are with the people who will set their IR35 status, the better. Understandably, they want to know that the agencies and businesses they work with are on the ball and that preparations are being made to gain the required skills.
It’s time to put their minds at rest. It’s time to prepare for IR35 reform.