With less than a year until the updated ‘off-payroll working’ rules come into play, HR leaders in the private sector must start preparing and planning for this significant period of change.
In April 2020, the end client must have the appropriate processes in place to determine the correct contractor status and ensure that the tax legislation is being adhered to. Much like the public sector rollout in 2017, this reform is expected to impact numerous companies and shake-up current procedures. Are you ready for what’s to come?
Outside or inside IR35?
The most noteworthy change being introduced in 2020 is that the responsibility for determining tax status is shifting from the contractor to the end client. This change means that employers must have a solid understanding of what is considered inside IR35 and what isn’t.
To put it simply, if a contractor is ‘outside IR35’ they are acting as a true business and if they are ‘inside IR35’ they are acting like an employee.
A freelancer is often deemed to be more akin to an internal employee if they are supervised, directed or controlled by the end client or if they are paid per hour or day. A contractor who is acting as a true business, however, will often have more than one client, have autonomy over their own hours and location of work, and will require any changes to deliverables strictly outlined in a contract.
Tenure is often used as an IR35 indicator, however, working with a client for several months or even years isn’t necessarily a definitive signal of status. For example, regardless of if a contractor has been with a company for an extended period of time, if they are still clearly working autonomously, they will be classed as outside IR35.
Additionally, the terms of engagement are also used to help determine status. Many contractor’s terms will include clauses that state that there is ability to opt out of employment rights, capacity to substitute and no mutuality of obligation, making it seem as if they are clearly outside IR35. However, despite these causes existing, it depends on how the role is truly carried out.
The key changes
As mentioned above, the most significant change is the shift in responsibility of determining the contractor’s status. However, there are other important differences that employers must be aware of.
Firstly, once the end client has assessed and decided the freelancer’s status, they must inform the worker prior to them starting or for an incumbent worker, as soon as possible prior to the point of invoicing. It will also become the fee payer’s responsibility to make any Pay As You Earn (PAYE) and National Insurance Contributions (NIC) reductions. Contractors deemed outside IR35 can continue operating their business as they have done before.
What did we learn from the public sector rollout?
Thankfully, HR strategists can analyse what happened after the 2017 off-payroll changes in the public sector and prepare for 2020’s likely outcomes.
Following the public sector rollout, we saw that many contractors challenged their employer’s decision when deemed inside IR35. Falling inside meant that they were taxed at the source and essentially making less money. This is expected to happen again this year, so HR teams should prepare for how challenges will be handled, as this can become overwhelming.
Due to the reduction in take home pay, many contractors demanded higher pay rates or sought work in the private sector. Of course, this isn’t an option this time around, but as small companies are exempt from the off-payroll changes, we anticipate that many workers could move to smaller firms or indeed look at opportunities overseas.
During the public sector rollout, many contractors also opted to work via an umbrella company and decided to become a PAYE temporary worker to avoid being deemed a limited employee and to receive the benefits that come with working as a PAYE professional. With this in mind, HR strategists should take time to map existing workforces, see where future gaps may appear and plan accordingly.
What are the next steps?
Based on what we saw in the public sector, we are advising the businesses we partner with to appoint a working party, involving stakeholders from various parts of the business. These stakeholders should include procurement, to help understand which contractors are in scope of this reform, and legal, whose experience regarding tax liabilities will be crucial. Both procurement and legal will need to work with HR and resourcing to assist with status assessments and tracking decisions. Finance should also be consulted in terms of cost consideration and IT for potential changes or new processes.
It’s also vital to not take any shortcuts when it comes to assessing contractors and determining which fall in scope. Businesses must take reasonable care in deciding the status, and undertake individual assessments on each role and group to avoid a blanket approach. There are three main methods which businesses use for assessments: an original, bespoke method tailored for the business; hiring organisations which provide tax services; and the HMRC check employment status for tax (CEST) tool.
Having policies and processes ready is crucial. To ensure consistency and fairness there must be a determination method in place. There should also be a structure outlining who is able to access data and will sign off final decisions and a system mapping how challenges by contractors will be dealt with and by who. Finally, once the new off-payroll rules have been implemented, it’s important to keep revisiting determinations and assess any changes in workers’ roles.
By acting now, HR strategists can anticipate any potential cost impact, put in place systems to manage additional administration and minimise potential risks around incorrect status determination.