Mark Lamb, Divisional Manager
IR35 is coming to the private sector in April 2020 and there are a number of questions end-clients should be asking themselves in preparation. But first, let’s go back to basics and talk about what IR35 is. This blog will help you to understand IR35 and what your business needs to do to prepare.
What is IR35?
IR35 is a legislation that was implemented in April 2000 to reduce tax avoidance. Prior to IR35, permanent employees were easily able to establish themselves as a limited company and significantly reduce their tax payments despite no change in their position. These individuals are labelled by HMRC as disguised employees.
Despite being aimed at those purposefully manipulating the system, IR35 also has an impact on those who genuinely supply their services to a client through their own limited company. A contractor working through an intermediary must remain ‘self-employed’ in the eyes of HMRC at all times, otherwise be deemed as inside IR35 and so liable for the same tax of that of a permanent employee – they would also be liable for the tax bill of their deemed employer.
IR35 in the public sector
Since the implementation of IR35, the responsibility of determining IR35 status fell on the contractor and their limited company would be liable for any tax and penalties. This all changed for the public sector during the April 2017 reform when The Government announced that this liability would now fall on the hirer.
The reform requires businesses to implement more robust compliance and administrative processes to ensure their contractors fall outside of IR35 – failure to do so can result in significant tax risk and penalties. The most notable legislation changes from that reform are:
End client responsibilities:
The hirer must now carefully assess the contractors they engage with or risk additional costs
Recruitment agencies are required to calculate and process tax via PAYE (Pay As You Earn) on each payment made to a contractor who is caught by the IR35 legislation
If there is no recruitment agency involved, the responsibility rests with the direct hirer
What impact is IR35 in the private sector going to have?
We asked Dave Chaplin, an active IR35 Lobbyist for Contractors and CEO of Contractor Calculator, his thoughts on the impact of the IR35 reform to the private sector. Dave said:
“Rolling out the new off-payroll reforms to the private sector would result in the largest upheaval in the contract market since the original IR35 in April 2000. All firms that engage contractors will have a considerably large compliance task ahead of them, as they will need to assess every existing contractor on a case-by-case basis as soon as they can and manage the changeover to minimise disruption to their business.
The considerable risk ahead is for firms that are engaging contractors who they subsequently assess as inside IR35. All of those contracts will require renegotiation, and it’s very likely that contractors assessed as inside IR35 will seek work elsewhere, rather than accept an inside IR35 status and the historic tax risk that accompanies it. This will then involve hiring replacements who will charge considerably higher fees if the contract is inside IR35.
To put in perspective the challenge ahead, imagine the response by your employed workforce if you told them they were all going to get a pay cut of up to 20%, and that it could be retrospective. It’s for that reason alone that preparations need to begin right now.”
10 IR35 questions end clients should be asking
Whether you’re working directly with ATA Recruitment, any other recruitment business, or even just engaging with contractors directly, you need to be considering the following things:
Are you able to identify all of the PSCs delivering services to your business?
How are PSCs currently engaged? (Via agencies or directly)
How do you currently manage IR35?
Do you treat PSCs differently from a permanent employee?
Have you considered the potential financial impact of IR35 to your business?
Do you have a robust compliant supply chain?
Would your business be able to cope with the peaks and troughs of projects without the ability to hire contractors?
Would your staff be prepared for the increased administrative burden?
Would your business remain competitive in your marketplace if you were not prepared for the IR35 reform?
How would your business cope if your contractors left and went to your main competitor?
Our compliance operation - IR35 Comply
ATA Recruitment has long been recognised as one of the most compliant recruitment agencies in the market. Working alongside our trusted legal partner, ATA can complete risk assessments on your current workforce. We can help to implement processes to ensure your business is in a position to take reasonable care when assessing a contractor’s status for IR35.
Our IR35 comply solution is perfect for end clients that want a much quicker and easier process for IR35. Our tool is cloud-based, and all assessments are fully traceable, storing evidence of decisions demonstrating reasonable care. There are 3 options to choose from:
A high level RAG analysis. A very basic look at the job title, rates of pay and contract lengths and labels the role red, amber or green.
Role reviews – this will help to move the ambers into red or green, providing much more clarity on the specifics of the role.
A full thorough overview of a specific assignment, including all details required to make a full IR35 assessment and demonstrate reasonable care.
IR35 support for end clients
Our dedicated IR35 support team are on-hand to answer any of your questions or provide IR35 support to your business. Whether you need general advice, or want to know more about the IR35 Comply solution, contact us below.