Following HMRC's 2017 reforms to regulate the use of off-payroll workers in the public sector, the UK government and HMRC plan to address compliance and what they see as lost tax revenue with off-payroll working rules in the private sector. The move is believed to impact up to 2 million contractors.
In this guide:
IR35, or the Intermediaries Legislation, is tax legislation designed to ensure individuals working through an intermediary, such as a limited company, are paying the right amount of tax.
ContractorCalculator defines IR35 as, "IR35 is tax legislation designed to combat tax avoidance by workers supplying their services to clients via an intermediary, such as a limited company, but who would be an employee if the intermediary was not used.
Such workers are called 'disguised employees' by Her Majesty's Revenue and Customs (HMRC). If caught by IR35, they have to pay income tax and National Insurance Contributions (NICs) as if they were employed."
HMRC's 2017 reforms to IR35 saw the responsibility for determining whether a contractor was a disguised employee shift to the hiring public authority. The government has claimed the changes have raised £410m in tax revenue through improved compliance.
However, Chris Bryce, chief executive of IPSE, which represents the UK's freelancer and contractor community, calls the move a "fatal blow to the UK’s flexible economy".
"Undermining confidence in our flexible, self-employed workforce is the last thing the government should be doing", added Bryce.
IPSE’s research suggests large numbers of contractors left the public sector, particularly affecting the NHS.
As reported by Staffing Industry Analysts, "HMRC published an IR35 consultation covering off-payroll working in the private sector, which aims to address compliance with off-payroll working rules in the private sector. The consultation will close on 10 August 2018.
The biggest impact on the private sector is that organisations and staffing companies will be held liable for tax charges for those off-payroll contractors found to be "inside" IR35. In addition, organisations found to have 'unlawful tax schemes' in their supply chains could be at risk of civil and criminal liability. Under new laws, such as the Criminal Finance Act 2017, a company can be at risk of conviction and unlimited penalties if they fail to prevent tax evasion by either a member of their staff or an external agent, even where the business was not involved in the act or was unaware of it.
The consultation will specifically look at how to increase compliance with the existing 'off-payroll' working rules. This means contractors working through their own company but are a disguised employee pay the right tax.
The IR35 reforms raises several categories of risk to manage when an organisation engages an external off-payroll contractor or freelancer. These can be broadly broken down into three main areas:
In order to remain competitive and relevant, today's modern business needs to work with external, contingent talent. It's a proven resourcing model for adapting and flexing to accommodating the need for an increasingly diverse range of skills and experiences.
The introduction of the IR35 reforms into the public sector saw 'at-risk' management and IT contractors increase their charge rates to cover for the additional tax and National Insurance liabilities incurred by them if they were deemed to fall 'inside IR35'.
If the IR35 reforms have a similar impact on the contractors in the private sector, there could be an overnight hike in costs for many business units, especially those where there is a heavy reliance on external contractors.
The key to controlling costs is visibility. Simply, if you have visibility and understanding of what every off-payroll contractor or freelance costs your organisation, you can manage it.
Problems with cost control start to arise when there are inconsistencies in charge rates across the contractors/suppliers/freelancers offering a similar service. Or where there is incomplete visibility of all the suppliers available to a business unit.
For example, without visibility it is possible for two different business units to engage two like-for-like contractors but pay them completely different rates.
So, in order to bring control into what your organisation pays for a given service, it is crucial to create a clear view of your entire external, off-payroll, talent population.
As mentioned above, IR35 and the Criminal Finance Act bring severe financial penalties for non-compliance. And the biggest issue for organisations is that they can be liable even if they are unaware of the activity.
To reduce the risk of non-compliance, organisations needs to be able to set and enforce compliant channels for engaging and onboarding external, off-payroll, talent.
For many organisations, contingent talent management is decentralised and therefore impossible to govern and ensure compliance. For example, anyone with a credit card can hire a freelancer through one of the many online freelance marketplaces.
One of the keys to reducing IR35 and other legal risks is compliant onboarding. The challenge most organisations need to overcome is how to simplify the process to engage an external freelancer or contractor.
For many, the legacy software, platforms and processes in place make it very hard for decentralised teams to engage external talent quickly and effortlessly. Currently, most will need to rely on a central HR function, who in turn will need to shoe-horn the request into a software package designed for much larger, or more traditional recruitment agency relationships or general HR functions such as the management of permanent employees.
Kevin Barrow, partner at international legal practice Osborne Clarke LLP, believes the correct application of specialist software will be crucially important for organisations. "The new IR35 regime in the private sector will involve record-keeping as to why any assessment was made that someone was outside IR35. A current problem with enforcement is the difficulty HMRC have finding anyone who can remember exactly how a contractor who was working 2-3 years before was managed etc.
The new regime is likely to reverse the burden such that, it will be for the "Fee Payer" (i.e. in most cases staffing company) to prove that in fact a contractor engagement was IR35 compliant. Clearly, software and technology will form part of the solution to this potential information challenge."
Modern on-demand/contingent talent management systems, like TalonFMS, offer a solution by supporting:
Unlike the other types of risk, where there is an immediate financial risk or penalty, the risk of a talent exodus poses a much longer term, and potentially more serious risk to an organisation.
The IR35 reforms in the public sector saw many contractors walking away from projects. The NHS in particular was hit hard, with 25% of departments losing half of their flexible workforce.
ContractorCalculator's research into the effects of the IR35 reforms on the public sector suggested that 71% of projects had been delayed or cancelled because of a lack of resource.
For many private sector organisations, the flexibility and diversity of skills in the off-payroll economy is absolutely crucial in order to remain competitive. If 70% of private sector projects are hit with delays or cancellations because there is no one to do the work, there could be a significant impact on the UK's economy.
The best way to retain the best external talent is mutually-beneficial re-engagement:
For an organisation to start including off-payroll freelancers and contractors in their total talent management strategies, a major prerequisite is having visibility of their entire on-demand/contingent population, complete with project history, skills available and charge rates.
Once an organisation has visibility and an understanding of where it needs external talent, it can re-engage existing talent quickly, all the while providing the supplier the reassurance of IR35 compliance through standardised contracts and onboarding processes.
It's clear HMRC’s IR35 reforms present organisations with a huge challenge, but it also creates a great opportunity for HR practitioners and HR departments. Efforts to get on top of contingent workforce management to avoid IR35 risks enables HR to look at the use of contingent labour from a wider business standpoint. It puts them in a great position to engage with business units to evaluate the reasons for use of external off-payroll talent in the first place and ensure that both compliant and efficient processes are in place. In other words, IR35 ensures the business units' attention, and helps create the necessity for a longer-term, more proactive review of their overall talent strategy.
Based on his experience with the IR35 reforms in the public sector, Carl du Plessis, Group Deputy HR Director, London North West Healthcare NHS Trust, gives the following insight:
"IR35 provides HR a great platform to get a seat at the table to review alternative engagement models, reasons for long term engagements and alternative resource models. It also allowed us to engage with business areas to reset the reasons for use of contractors. All these things are good practice anyway and should be done but change in regulations helped get the attention of the business areas.
So, whilst the IR35 consultation goes on, I would urge all my HR colleagues to start looking at use of contractors and get best practice in now. It will reduce impact and risk when/if the IR35 consultation is extended. And if the consultation is not extended, you still have a better controlled, more cost effective resource model. In other words, it's a win-win."
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