Why IR35 is Nothing To Be Afraid Of

As business leaders will be aware, changes to IR35 legislation were due to come into effect in April 2020 and delayed until April 2021. As the new date approaches, we wanted to address the changes to IR35 and some of the approaches to contract resourcing that businesses have adopted in preparation.

What is IR35 UK?

Business leaders will be familiar with IR35 legislation, introduced in 2000 by HMRC to tackle contractors and interims who were perceived to be sidestepping their fair contributions of PAYE and tax by operating as ‘disguised employees’, rather than delivering a true contractor service delivery model.

IR35 was also introduced to protect interims and contractors properly operating through limited companies and providing high-level services from being coerced into functioning within an organisation like an employee.

IR35 changes 2021

The changes due to come into effect in April 2021 will mean that the responsibility of status determination of whether a contractor operates outside of IR35 and therefore as a limited company, or inside IR35 as an employee will now fall to the end-user business. Prior to this, it was the onus of the contractor to self-declare their compliance.

What does IR35 mean for businesses?

The new IR35 changes will mean that businesses will need to review their policy, project priorities and resources and decide how they will approach interim and contractor engagements in light of the financial implications that an incorrect status determination would mean.

Larger organisations such as HSBC, Barclays, Royal Bank of Scotland, Morgan Stanley, and others revealed last year that they would no longer engage contractors who operate via personal service companies (PSCs). This blanket approach and eradicating contractor engagements severely reduces the value that contractors and interims provide as skilled, knowledgeable resources.

According to Brookson Legal, a leading IR35 law firm, 59% of businesses were considering similar policy changes because they didn’t have the time to assess contractors individually to make the correct status determination.

However, organisations should feel confident and comfortable taking on the process of status determination as there are many means and resources to help them achieve it, including the government’s own Check Employment Status Tool (CEST) tool. Taking a risk-averse approach and deeming all contractor engagements as within IR35 can pose just as many financial risks as an incorrect status determination of outside IR35. HMRC will still examine the engagement and may find the criteria to fall outside of IR35, at which point businesses will face fines, and in addition to this will have paid additional fees when they could have only been paying for the interim’s contract duration.

There are several factors that HMRC would look at to determine IR35 compliance:

Supervision and control

Ensuring contractors function autonomously within your organisation.

Substitution

A way of assessing whether your contractor falls outside of IR35 is to consider whether they could be substituted by another. If the answer is yes, then the engagement is outside of IR35.

Equipment

Contractors and interims are expected to use their own equipment and technology. They can have access to internal systems but shouldn’t use company equipment to fulfil their contract.

Obligation

There should be no obligation on the part of the end-user business or the contractor to continue the engagement after the initial contract has been fulfilled, unless agreed upon as a new project engagement, and then a new contract agreement should be drawn up.

Support for businesses making IR35 status determinations

We have partnered with Brookson Legal to support our clients through the status determination process. Having conducted thousands of employment status assessments every year since the IR35 legislation was first introduced in 2000, they can offer audits, educational packages and assistance with new processes and policies.

For businesses, we can ensure they find the interim or contract talent they need, while remaining fully compliant with IR35 guidelines.

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