Following the introduction of the Off-Payroll legislation that is due to take effect from April 2021, hiring organisations have just a couple of months to get their hiring plans in order so that they can continue to take on contractors for projects with as little disruption as possible. The new tax rules will mean that they will be responsible for assessing the tax status of their contracting workforce. Faced with the challenge, some hirers might be tempted to try to mitigate the administrative burden by conducting non-compliant ‘role-based’ blanket assessments, in which contract vacancies are grouped together and assigned a deemed IR35 status, regardless of the contractor’s individual circumstances.
Not only are blanket assessments non-compliant, but firms that adopt this approach intensify already acute recruitment challenges. By alienating the very best contracting talent they diminish their talent pool. The best contractors have the most bargaining power and won’t consider working for up to 25 per cent less income, which is what being found ‘inside IR35’ means for most. Most contractors would sooner look elsewhere for opportunities working on an ‘outside IR35’ basis with a firm that carries out its compliance responsibilities correctly.
In addition to fulfilling a legal obligation, being compliant with the Off-Payroll legislation can also become a major competitive advantage for hiring firms. For every organisation that refuses to fulfil its requirements under the Off-Payroll legislation, there is another firm ready to capitalise on a situation that only requires complying with the law, which simply means conducting a thorough and considered assessment of the IR35 status of each of its contractors.
It’s simple; if a hiring firm is seen to be comprehensively evaluating its contractors on a case-by-case basis with fair assessments, it will attract more contractors and stand out in a shrinking market to the best and brightest talent. Achieving this needn’t be an expensive or laborious process.
Providing a company has conducted a thorough and fair assessment of each contractor and accompanied each determination with a Status Determination Statement (SDS) demonstrating that they have taken reasonable care, issuing an ‘outside IR35’ contract should cause no concern.
The necessary processes include:
- Maintaining records of status assessments, including retaining copies of Status Determination Statements
- Monitoring engagements to ensure that the status determination remains accurate
- Building an IR35 defence pack to protect themselves in the event of an HMRC investigation
What is a ‘Status Determination Statement’ (SDS)?
Upon assessing a contractor’s IR35 status prior to beginning a contract, the hiring organisation is required to provide the contractor with an SDS. This is a comprehensive statement which fulfils two primary purposes:
- Declares the contractor’s deemed employment status
- Details the reasons for the hiring firm having reached its conclusion
Though the legislation fails to elaborate further, it is understood that a sufficient SDS details the information provided concerning the engagement, the conclusion, and the reasoning for this conclusion following the consideration of the information provided.
Where a contractor engages directly with a company, the company should present the SDS to the contractor. If there is an agency in the supply chain, the SDS must be passed down via the agency, as well as directly to the contractor. Similarly, more than one agency in the supply chain means the SDS must be passed down via each intermediary so that each is informed of the status determination and their subsequent responsibilities.
Crucially, the draft legislation clarifies that the requirement for a valid SDS is not met if the hiring firm fails to take ‘reasonable care’ in reaching its conclusion, in which case they assume the role of ‘fee-payer’ and carry the tax risk. A typical contractor engagement involves a recruitment agency as fee-payer, whose responsibilities and liabilities include:
- Reporting and deducting tax and NICs from the income of ‘deemed employees’ via PAYE
- Liable for employer’s NICs (13.8 per cent) and the Apprenticeship Levy (0.5 per cent) on top of fees paid to deemed employees
- Liable for any outstanding tax, penalties and interest if HMRC challenges a status decision
The prospect of becoming the fee-payer will incentivise hiring firms to carry out their due diligence, which they can very easily achieve. In summary, firms must provide a valid SDS to meet their statutory obligations.
What is ‘reasonable care’?
The Off-Payroll legislation has introduced a requirement in the form of ‘reasonable care’. Although there isn’t a legal definition of reasonable care within tax legislation, it is a well-established principle in case law.
For hiring firms, one way to all but guarantee the application of reasonable care is to fulfil the compliance steps namely:
- Monitoring the working conditions throughout the duration of the contract
- Enlisting legitimate IR35 expertise to aid with status assessments
These compliance measures offer ample protection should the taxman come calling. With just months to go before the new tax rules take effect, it is vital that compliance protocols are established now so that firms can hang on to their contingent workforce and minimise disruption to projects, mitigate against potential rising costs and keep their administrative burden at a minimum. Those firms which act now will reap the rewards.