At the start of the month, the government launched ‘Off-payroll working rules from April 2020’, a policy paper and consultation looking at how the reform of the off-payroll working rules should be implemented within the private sector. Key stakeholders, including hirers, recruiters, and contractors, have been given the opportunity to provide comments by 28 May 2019.
IR35 isn’t particularly new – it was introduced in 2000 to ensure that self-employed contractors pay the correct income tax and national insurance. The recent change is that from April 2017, within the public sector, the obligation to determine tax status and the associated tax risk moved from the worker to the hirer. A similar shift will apply to medium and large-sized businesses in the private sector from April 2020. Hirers are required to take “reasonable care” when assessing roles.
While the government is inviting a wide audience to respond to the consultation, there is a strong sense within the policy paper that HMRC is going ahead with the changes and this process is as much about stating how the rules will be implemented as gathering feedback. With this in mind, HR professionals need to get their heads around the changes now and avoid last-minute panic.
Here are six IR35 steps that your HR team can take now:
Do your homework
Lessons must be learned from the public sector implementation of IR35, where some organisations panicked and made poor decisions. For example, incorrectly classifying contractors as inside IR35 and forcing them to move to PAYE will lead to a loss of talent.
Now is the time to learn more about IR35 and what it means. IR35 has not troubled hirers, historically, but there is now a commercial imperative to understand the rules as you don’t want your business to face unexpected tax bills or investigations for non-compliance. Equally importantly, the incorrect approach will put you at a disadvantage in the competition for much-needed contractor talent. Read the consultation closely and talk to your senior management team so everyone is aware of the forthcoming changes. IR35, and the employment laws that sit behind it, is complex. If you don’t understand it, take advice from someone who does.
Undertake a workplace audit
This is a top priority. HR teams should audit their existing flexible workforces and establish the nature of the contract and working practices of each contractor. When audited, you are likely to find that some contractors are clearly outside of IR35, while others are inside. Most organisations also find that they have a pool of contractors who fall somewhere in the middle and for whom they can help to keep their contractor status through changes to their working practices.
Begin conversations with affected workers
Transparency will help to minimise contractor conflict and confusion. Contractors will understandably have many fears – switching to PAYE could reduce take home pay for contractors by 20 per cent so emotions may run high. It is vital that contractors feel part of the conversation and understand how seriously you are taking the reforms. They will be seeking reassurance that you will take ‘reasonable care’ and won’t simply impose blanket IR35 assessments.
Take the opportunity to confirm that the IR35 change won’t spell the end of contracting and that you are committed to having a flexible workforce. If contractors are currently outside IR35, providing you fulfil your obligations, they should continue to be outside and do not need to fear the rules. If they are inside IR35 but want to remain as a contractor, you can assure them that, with the right legal advice, there might be things that can be done to help them stay outside of IR35 and maintain their contractor status.
Talk to your supply chain
Spend some time identifying and reviewing your current engagements with intermediaries and agencies that supply labour to you. Make sure they have read the consultation and understand the coming changes. Stress that from April 2020 onwards, the liability for non-compliance will rest with the party that has failed to fulfil its obligations. This means that liability will move down the labour supply chain as each party fulfils its obligations. This is a big change and will increase the risk on everyone in the supply chain. It shows the importance of each party putting robust processes in place this year.
Pioneer best practice
When it comes to the implementation of IR35, HR personnel are on the front line. In the consultation, the government refers to medium and large-sized private businesses having ‘relatively sophisticated HR processes in place’ and expects them to be able to embrace the changes and deliver a status disagreement process if required. There is a real opportunity for HR professionals to lead the business in pursuing best practice and compliance. It is good for stakeholder confidence if you can demonstrate that you have policies and processes in place in advance of the 2020 deadline and that as a company you are leading the conversation. Consider forming a cross-functional team (across HR, finance, and procurement) to spearhead the project and get ahead of the reforms. Put in place comprehensive and joined-up processes, review internal systems and talk to peers.
Seek specialist support
The changes to IR35 are nothing to fear, more a bump in the road for HR teams to navigate. It will require new policies, processes, and structures, but once these are established the disruption should be minimal. It can be complex to discern where workers fall in terms of IR35 and that’s where hirers may benefit from enlisting the support of an external legal IR35 partner to help them comply with the new obligations and ensure they have peace of mind that they’re not overlooking any element of the legislation.
HMRC has been clear in its guidance that organisations need to step up to the IR35 mark. The time to take action is now and, while it may seem daunting, the legal IR35 support is there to help businesses and HR through this challenge.