Andrew Brookes – Employer Tax Solutions Specialist
Subsequent to a challenging roll-out to public sector hirers in 2017, April 2020 will shift responsibility for deciding whether IR35 applies to private sector employers. Its key that businesses have a concrete understanding of the testing for IR35 status and the possible consequences for making mistakes. So, what are the 10 things private sector employers need to know?
It’s a requirement for Medium and large enterprises to conform with the new rules
As of April 2020, deciding whether the conditions for IR35 are met will swing from contractors and their personal service companies (PSCs) to their private sector hirers. This only applies to medium and large companies at this stage, those satisfying at least two of the three tests;
- Balance sheet over £5.1 million;
- Turnover over £10.2 million;
- More than 50 employees.
LLPs and unincorporated businesses need only consider the second test.
Budget for larger costs
Effective budgeting will be vital to avoid experiencing cash-flow problems as new procedures will entail additional costs for businesses.
As an example private sector engagers might need to start paying employers’ National Insurance Contributions (NICs) and, in some instances, the Apprenticeship Levy. Undertaking IR35 reviews will probably incur professional fees or internal administrative costs, therefore integrating these into financial models can help to reduce impact on the company’s cash position.
Understand two different methods for determining IR35 status
Determining IR35 status has caused much confusion in the public sector due to the complex nature of the process, with two contrasting methods. To help employers, HMRC has made an attempt to streamline the process by introducing its Check Employment Status for Tax (CEST) tool, which determines whether a worker can be categorised as self-employed or not. HMRC has recently refined the tool. Direction provided by case law advises “painting a picture”, stepping back and questioning – does this look like employment or self-employment? The two methods will not always give the same outcome!
Review working practices and current contracts
An assessment should be undertaken to determine whether IR35 applies. This assessment should include whether the individual’s contract is telling of a business-to-business arrangement rather than one of master and servant. The individual’s working arrangements need looking at to see whether they match what is stated in their contract.
Even if contracts clearly show that they are self-employed, it is common for indicators of employment to creep in over time as familiarity grows e.g. invitations to staff only events, like a Christmas party.
Both the working practices and contract must support self-employment, to prevent IR35 from applying.
Deliberate who to inform
Businesses must communicate their decision and thought process to the business they pay and the worker, where IR35 is found to apply.
Implement an appeals process
Contractors will soon have the right to challenge an employer’s IR35 assessment due to the introduction of a new ‘client-led status disagreement process’.
A contractor has the ability to appeal an employer’s judgement, who must then respond within 45 days. Businesses should ensure they have a fair and complete appeals process far ahead of April 2020, as well as considering the likely impact on their cash position and existing resources.
Review employment models
Of interest to both end clients and contractors could be renegotiating the workers contracts, specifically, choosing to make them direct employees, including strong distinguishing factors in comparison to the prior contractual agreement.
Be cautious of transfer of liability rules
From April, HMRC will effectively be able to transfer the debt, where a party in the supply chain has failed to apply PAYE, up the supply chain. HMRC can initially pass the debt to the staffing company which holds the contract with the end user, if they are unable to recover funds from the business paying the PSC. If the agent cannot pay, the liability can be transferred to the end user. To mitigate risk engagers should demonstrate they have taken reasonable care by being satisfied that everyone in the supply chain is tax compliant.
Consider cutting back the number of agencies in the supply chain
A way that businesses can absorb added costs attached to IR35 compliance is to consider cutting back the number of agencies in their supply chain. Furthermore, this helps to reduce the risk of non-compliance by others in the supply chain, also protecting against the transfer of liability.
Take professional advice and be ready
The new rules will increase costs and administration for businesses, particularly assessing status, dealing with disputes and liability for additional taxes.
With April 2020 less than two months away, it is important for private sector engagers to be aware that any changes to their employment practices and internal processes are likely to take time to implement successfully. Getting up to speed with the changes now and seeking the right professional advice, will give businesses the time to conduct a thorough review of their employment practices and ensure they fully understand their implications.