Despite the Conservatives promise of a formal review into the Off-Payroll rules it now seems a done deal that the new legislation will take effect from April with very few changes. The Government is ploughing ahead with its plans to roll-out the reforms in an attempt to raise more taxes from what it calls ‘deemed employment’. The impact on contractors working in the private sector cannot be underestimated along with the impact on those companies that rely upon the skills of these on-demand flexible workers. Off-Payroll compliance will prove vital to a firm’s continued engagement of contractors, who will naturally seek engagements where they can secure fair tax treatment that reflects their “outside IR35” status. Those mistreated are likely to quote increased rates, or seek work elsewhere.
A diligent, structured approach to compliance not only mitigates risk and appeases contractors, it also minimises the added administrative and financial burden of hiring “deemed employees”. We are aware that many hirers are yet to put a robust compliance process in place to ensure they can retain their existing contracting talent. Recruiters have warned it could lead to rife non-compliance and requested that the Government delays for a further year. But, this valid plea has fallen on deaf ears. So, the challenge for hiring firms is to navigate the new Off-Payroll world without exposing themselves to an excessive administrative burden or financial risk. Whereas the latter two factors have contributed to concerns of widespread abuse of the legislation, an approach to compliance that mitigates risk and appeases all parties isn’t difficult to achieve. For companies yet to start.
Identify your limited company contractors
The first step is to identify those contractors who require assessing under the Off-Payroll rules. Enlist your recruiters’ help in identifying only the contractors engaged via a limited company and omit from this list any contractor leaving before April 2020.
Next, evaluate your workforce and group together contractors with similar working practices or contracts. Adopting a quality Off-Payroll compliance solution or provider is crucial, as they will help identify engagements that pose an IR35 risk and can advise you on the practicalities of altering any working conditions to mitigate any risk across the workforce.
Using your adopted compliance solution, carry out an initial assessment of your contractors based on the information at hand – the contract and the working conditions. The result will be key in informing the next steps, and answering questions such as:
- What is the accumulative employment tax liability for ‘inside IR35’ contractors?
- What status factors are imposing risk upon the company?
- What projects are at most risk from the Off-Payroll rules?
Some contractors may be more expendable than others, and so you’ll have to identify those who need to be retained at all costs and prioritise addressing these engagements.
Plan for all eventualities
Having sought answers to the important questions and identified IR35 risk factors, you’ll be ready to establish a plan for your workforce going forward. You might find that certain policy changes to contractor working practices are enough to mitigate IR35 risk effectively and allow a number of contractors to operate outside of IR35.
But remember, any changes made must be realistic, rigidly applied in practice and reflected in newly drafted contracts. Any contractual amendments that aren’t enforced in practice could rightly be dismissed by HMRC as a ‘sham’, resulting in problems for the offending party.
Where such amendments aren’t possible for contractors to achieve ‘outside IR35’ status, further issues will need to be considered, namely:
- Which contractors will be difficult to retain on an ‘inside IR35’ basis?
- How much would it cost to retain key individuals?
The Off-Payroll rules were always going to be a cause of conflict, and many contractors will either disagree with a deemed ‘inside IR35’ assessment or will respond by seeking opportunities elsewhere.
Key individuals could still be retained if contract rates were to increase to counter their tax hit, which in turn would limit disruption to projects. Ultimately, a financial plan is required to weigh up the relative costs and prioritise expenditure to ensure the impact of Off-Payroll on projects is effectively mitigated. Many firms have opened their bargaining positions with the unrealistic aspiration that rates will not be increased when contractors are pushed on to payroll – but the free market will have other ideas.
Communication, execution and continued compliance
Having conducted a full IR35 status assessment, which needs to factor in the contractor’s limited company business, outcomes will need to be communicated. This is crucial to establish the plans of those deemed within the scope of IR35.
You might find that explaining to contractors that they have been found ‘inside IR35’ following a considered IR35 status assessment is enough to reduce resultant arguments and status disputes. And of course, a contractor subject to a full assessment may be far more inclined to stick around than a disgruntled contingent worker who has been subject to a blanket assessment by the hirer. But, for those assessed inside IR35, the fear of historic tax risk is more likely to result in them moving on.
Any rate renegotiations for affected contractors who plan on staying should be conducted at this stage, while those who are leaving will require termination notices. Many recommend that hirers engage ‘inside IR35’ contractors via a compliant payroll company, effectively outsourcing the tax processing compliance. Those who are to be offered an alternative operating model will need to be served termination notices for their current contracts before switching. All of this should be done before March 2020.
And remember, Off-Payroll compliance is an ongoing process. Each contract renewal warrants a new status assessment, and sustained monitoring of the workforce is required to ensure that working practices continue to reflect the written agreements.
Off-Payroll compliance is paramount
The coming weeks are critical for those companies that rely on contractors to get projects done. By taking a proactive and strategic approach to Off-Payroll compliance, firms will be able to hang on to their contingent workforce whilst minimising disruption to projects, mitigate against rising costs and keep their administrative burden at a minimum. Those firms which act now will reap the rewards.
- Dave Chaplin: How firms can reach IR35 compliance quickly and effectively - Thursday, February 20, 2020