IR35 Compliance For Hiring Managers
Talking about paying tax and government legislation brings two things to mind: paint and drying.
But you must be here for a reason, and that reason usually, where IR35 is concerned, starts with the word ‘what’.
What is IR35? What do I need to do to get IR35 compliance? What does IR35 mean for hiring managers? You’ll find the answers below:
- What is IR35?
- What Changes Will IR35 Bring?
- What Does This Mean For Hiring Managers?
- What Can Hiring Managers Do To Comply with IR35?
- Are Certain Industries More Affected
- How Recruitment Agencies Can Make IR35 Easier for Hiring Managers
- IR35 Tools for Hiring Managers
IR35 is a set of tax laws designed to figure out whether a self-employed worker is genuine or cheating the tax system.
That’s it in a very loose nutshell.
IR35 has been active since HMRC first realised there was a loophole in how contractors were paying things like holiday pay, national insurance, and PAYE.
That was 2000 and Gordon Brown was Chancellor of the Exchequer. Throwback.
Since then, public sector contractors have been responsible for self-assessing their IR35 status and National Insurance Contributions. This arrangement has, according to HMRC, been less than satisfactory and the HMRC estimates that, under current rules, the cost of non-compliance in the private sector would escalate to £1.3bn by 2023/24.
An even bigger problem for HMRC was the scale of the contractor market. There are an estimated 1.77 Million contractors in the UK. That’s a lot for a reportedly understaffed department to keep in check.
Wouldn’t it be a lot easier to police the one commonality between all these contractors: the person hiring them?
So in 2020, that’s exactly what they decided to start doing with a new wave of IR35 legislation.
That legislation will be applied to the private sector and it will shift responsibility for paying these taxes and fees away from the contractor and towards the fee-payers. (The sweeping term for the person responsible for paying the contractor).
It may all seem like doom and gloom but the silver lining here is that HMRC seem to have a pretty stable standard for what IR35 compliance looks like and that’s unlikely to change.
So if you’re IR35 compliant now – you’ll be IR35 compliant come April 2020.
With that in mind, it’s a good idea to do all the hard work now while there’s still time.
Up until the proposed changes come to pass, the contractors themselves have been responsible for figuring out if they fall inside or outside IR35 and then paying the correct amount of tax themselves.
The new IR35 legislation to be introduced in April 2020 shifts responsibility for assessing IR35 obligations from the contractor or PSC to the end-user, that is the company that uses contractors.
That’s hiring managers and people in recruiting positions.
And according to the Finance Bill released earlier this year, it was confirmed the ‘client’ or ‘hirer’ are the ones responsible for any tax shortfalls, as well as deciding if the contractor falls inside IR35.
Where the end-user concludes that IR35 applies, the company who pays the contractor (which may be the end-user themselves, a recruitment agency, or other third party paying the intermediary) will be responsible for accounting for and paying the related tax and NIC to HMRC, including the additional cost of Employer’s NIC.
Under the proposed changes, the new rules aim to reduce the cost of non-compliance and make it easier for HMRC to monitor and enforce compliance in the future.
The new rules will apply to
- medium and large businesses in the private sector that are the end-user of the worker’s services,
- the party that pays the contractor, which could be the recruitment agency in some cases
- contractors providing services to medium and large businesses
Well, as the final intermediary of the contractor’s work services, you will be directly responsible for the following:
- Assessing whether your contracted employee falls ‘inside’ or ‘outside’ IR35 by communicating with the recruitment agency (where applicable) about the contractor’s employment
- Figuring out who the fee payer is (such as a recruitment business or agency that pays the worker’s intermediary.)
- Ensuring the salary payer calculates any tax and NICs, and pay straight to HMRC, without deductions from the contractor’s fee.
So, if you’re going to be determining the status of your contractors, you’d better swat up on the rules of being inside and outside.
HMRC’s aggressive pursuit of GSK contractors has given us a snapshot into the stance they plan on taking. So, as someone in a hiring position, it’s important you start with the following:
- Familiarise yourself with HMRC’s Good Work Plan and keep your finger on the pulse of upcoming changes.
- Cultivate an open dialogue across your business where knowledge on changes can be shared in a healthy manner
- Audit your contracting employment, how many PSC’s do you work with?
- Set up a robust system for determining the employment status of a contractor that involves all those in the chain of employment
- If you work with a recruitment agency, ensure that the upper-level contract is watertight. Any discrepancies between this contract and that between the agency and contractor can cause the contractor to lose an investigation into their accounts.
- HMRC also recommends that businesses should start reviewing internal systems such as payroll software, process maps, HR and on-boarding policies to see if they need to make any changes.
- Look into IR35 insurance (more on this below)
- Ensure your contractor’s professional indemnity insurance (which is a really good indicator of a contractor’s IR35 determination) is present and sound.
The short and simple answer is yes.
The nature of a contract role, and what the contractor performs in those roles, is reliant solely on the industry.
And this becomes all the more important with IR35 determination being heavily weighted on what a contractor does on the job.
Take for example the contracting roles of a bricklayer and a software developer.
And although we are using admittedly broad, sweeping generalisations on contractors in their industry, the point still remains:
Some industries have more control over their contracted staff and therefore will have a harder time proving they aren’t a ‘disguised employee’.
Can A Hiring Manager Just Sack Their Contractors If They Fall Outside IR35?
Well, first of all, contractors are a massive part of the UK workforce and are likely an even bigger part of your project’s health.
Just cutting them out is not the answer.
Something HMRC neglected to recognise when they released the first iteration of IR35 and failed to include a reasonable care clause.
This led to sweeping layoffs for contractors and limited companies.
In the new draft of the legislation due in April 2020, the reasonable care clause is included meaning you need to prove reasonable care.
So you will need to prove that you explored other options, including a permanent position and work towards moving the contractor inside IR35.
What’s important to remember that it isn’t illegal to be inside IR35 and, for some contractor/client relationships, being inside IR35 might be a necessity.
But if it’s imperative that you avoid IR35 at any cost – take note of these tips.
With the emphasis now being put on the fee-payer, recruitment agencies now find themselves in a position of due diligence and as such are beginning to invest a lot of time and resources into making this process easier for both candidates and hiring clients.
Going Direct To Contractors Makes You Wholly Responsible
Going straight to the PSC Limited Company or the Contractor will mean that you are 100% wholly responsible for their IR35 determination.
This is a double-edged sword.
Would you rather lean on a recruitment agency to provide IR35 support? Or would you rather have fewer people in the chain and sort out everything yourself?
Recruitment agencies offer all of their contracting staff insurance. Already, many recruitment agencies are building out their contractor insurance packages to include IR35 insurance which indemnifies everyone in the chain of a contractor’s employment.
In addition to this, the insurance also offers the following cover:
- Cover fines and legal penalties (up to £100,000)
- Covers any HMRC checks
- Ensures the fee-payer always has legal representation should they end up in court
The only caveats here are that regular contract reviews have to be performed, which most recruitment agencies worth their salt will perform anyway.
A number of IR35 tests and checklists have sprung up over the past few months that are geared towards the upcoming changes.
They have hiring managers in mind and can be used to quickly and thoroughly check through your contracts.
We’ve brought the most authoritative ones together in one place so you can easily build a good picture of which of your contractors fall inside and which fall outside.
To support our own contractors threatened by the new changes, we’ve built our own determination tool, VenturiOPRaaS.
Working with external consultancies, tax and legal advisors, Venturi has invested heavily in partnerships with industry experts to build a solution that is compliant and can mitigate the risks associated with OPR for end-users/clients and contractors.
This solution involves a multi-step approach of reviewing, auditing, assessing the contractor population and indemnifying outside workers with bespoke insurance.
At the centre of the VenturiOPRaaS strategy is a determination tool, backed by a leading contractor tax and insurance specialist. The VenturiOPRaaS tool has been built based on case law IR35 tribunals since 2000, making it one of the leading tools on the market.
Unlike many other tools, VenturiOPRaaS has human intervention; a tax expert, not just an algorithm and each and every case is reviewed individually – ensuring contractors have expert determination that is aligned to their individual assignment and hiring managers stay within the reasonable care clause with determinations.
You can try the tool, which is a ‘must bookmark’ for hiring managers and contractors alike, here.
Contracting Is About To Get More Complicated
The only thing that makes complete sense here is that contracting is about to get more complicated for hiring managers.
The good news is that we’re in this together. Download our IR35 FAQ Sheet by clicking on the image below: