For businesses that engage with contractors, the forthcoming changes to the off-payroll rules – or IR35 – present one of the biggest challenges in recent years.

IR35 requires businesses that engage the services of contractors operating through their own limited company to consider the employment status of that contract. This is done by carefully assessing the contract that has been agreed, as well as the current working practices, in order to conclude whether contractors are acting as “disguised employees” and are therefore deemed inside IR35.

In order to satisfy HMRC guidelines, this needs to be done taking “reasonable care” to ensure that the employment status decision is correct. Once they have been found to be inside or outside of IR35, this outcome then needs to be provided to the worker, and any intermediary supplying the worker, prior to 5 April 2020.

Given that businesses have not had to consider this before, it may feel like a daunting exercise.

As such, some businesses have already taken the view that this is too difficult for them and have significantly reduced the number of limited company contractors, with some mandating that all contractors must be engaged via an employed route and subject to pay as you earn (PAYE).

Despite some large organisations applying these blanket approaches– the businesses that Brookson has engaged with are taking a rational and commercial approach to the changes.

Here are our top ten considerations for hirers:

1. Establish a working party. IR35 should be viewed as a business-wide project and typically we would expect to see representatives from finance, HR, procurement, tax, legal and hiring managers represented in any strategy meetings.

2. Identify your off-payroll workers. Only once you have done this can you consider the size of the project. Impacted workers can be identified in a variety of ways including reviewing your purchase ledger for any directly engaged contractors and speaking to the agencies you use to source your contractors. Don’t forget to consider any outsourced service providers too – this is often a hidden population but could present a risk if they use contractors to fulfil projects.

3. Consider your supply chain communication plan. Many contractors are now aware of these changes and are seeking reassurance that they will be treated fairly. You will need to ensure any communications are consistent and managed throughout your supply chain.

4. Undertake a status assessment of your impacted worker population. This is probably the most challenging part of the IR35 process. Employment status is determined by decades of case law and requires an expert opinion to ensure it is correct. You should consider what external resource you require to assist with this assessment.

5. Take steps to improve your position. Once status assessments have been undertaken, you may find that there are some quick wins that can strengthen your position. These can include tidying up of contracts to correctly reflect the self-employment relationship or operational changes around management and control of workers You may also find that, depending on the approach you take with your IR35 assessments, there will be a population of contractors whose employment status can still not be determined, and further specialist advice is required.

6. Agree approach to captured workers. For those contractors found inside IR35, you need to have a clear policy for how you or those in your supply chain can continue using contractor services. This could include considering a pay increase, different methods of engagement or back filling if they do choose to leave.

7. Secure your supply chain. This stage of becoming IR35 ready is critical but often gets overlooked. If impacted workers move to non-compliant payment vehicles you could be at risk of having to backdate taxes as the new legislation carries debt transfer provisions.

8. Issue status determination statements to the supply chain. Changing IR35 legislation requires you to communicate your status decision, as well as the reasons behind it, in the form of a status determination statement (SDS).

9. Handle status queries. You will need to devise a “hirer led challenge process” to allow impacted contractors an opportunity to challenge your decision. The legislation then requires you to respond to any challenges within 45 days. Will you manage this yourselves or outsource to an independent employment status specialist?

10. Monitor and audit existing and new roles. Your obligations don’t end on 5 April 2020.  You will need to ensure you can demonstrate ongoing compliance with IR35 when engaging with contractors.

With the above steps in mind, it is critical that hirers start documenting their IR35 journey now. Having this information on record will help firms to resolve any enquiries from HMRC quickly and robustly. Written documents will also help hirers prove that they have acted with reasonable care if challenges arise.

It’s worth reiterating, however, that IR35 is complicated tax law and hirers should be getting advice from specialists wherever possible. Seeking expert support, such as that from Brookson Legal, will help businesses to navigate the complexities that come with assessing contractors on an individual basis, and it will also help put the right policies, processes and structures in place to ensure long-term compliance. This should be the end goal for all hirers– especially those who want to continue benefitting from valued contractor talent in the future.

Matt Fryer bio:

Matt Fryer, Compliance Director at Brookson Legal, is a Chartered Tax Advisor with 18 years' experience of advising on tax planning and compliance. Matt has been with Brookson since 2009, having previously worked for Big 4 accountants, KPMG and PwC. Matt’s primary role is to ensure that the services provided by the Brookson Group comply with relevant legislation and regulatory requirements. Matt is also a Board member of the FCSA, the UK's leading membership body dedicated to promoting supply chain compliance for the temporary labour market.

Image credit | iStock