Dave Chaplin is CEO of IR35 compliance solution IR35 Shield. In a three-part guide, he will outline the challenges of the incoming Off-Payroll legislation in the private sector, offer advice on how firms can best assess a workforce and discuss the importance of ongoing compliance and protection.
Part One: the challenges and the perils of Off-Payroll
April 06th 2021 is an important date in next year’s calendar. It is when the Off-Payroll legislation comes into effect in the private sector and the responsibility for assessing a contractor’s employment status switches to the hirer. Therefore, with less than five months to go, it is critical for firms engaging limited company contractors, as well as their advisors and accountants, to start preparing now. This will help ensure smooth and proper implementation and mitigate the consequences of leaving things too late.
What is the Off-payroll legislation?
The legislation is billed as reform of the intermediaries legislation, despite the two being completely separate statutes. The original legislation, which will still apply to contract engagements with small companies, is found in Chapter 8 of the Income Taxes Earnings and Pensions Act (ITEPA) 2003 and was always referred to as IR35. It sets out the tax rules to be applied to limited company contractors who are considered “deemed employees”.
Since 2000, when IR35 came into effect, contractors have been required to assess the tax status of their own engagements and calculate the tax appropriately. Now, under the new Off-Payroll legislation, the onus lies on the hiring company, which can now also be liable for extra employment taxes where an individual is deemed ‘employed for tax purposes’.
Assessing employment status is complex which is why Off-Payroll compliance needs expert assistance. HMRC can pursue companies for backdated tax sums when it believes an incorrect assessment has been made. Therefore, the importance of thorough compliance processes cannot be overstated.
It’s critical for firms to understand that there are fundamental differences between the original legislation and the new legislation. Adopting an old approach to this fresh challenge is simply not going to be enough. The manner in which HMRC runs IR35 cases is very different today, and the case law has moved on considerably. Any compliance strategy will need to be built around a solid understanding of how cases are now defended and argued in court.
The perils of non-compliance
Additional administration along with taking on the risk of tax liability has seen many businesses taking a knee-jerk blanket ban approach and ceasing to engage contractors via limited companies. We saw it happen in the public sector in 2017 and again in the build-up to the private sector rollout that was due to happen in April 2020 before Covid-19 brought about a pause.
Companies that have so far failed to prepare for the Off-Payroll legislation must use the next few months wisely.
Inaction by hiring organisations in the public sector resulted in the widespread adoption of non-compliant blanket approaches to status assessments, causing contractor walkouts, recruitment struggles, and disruption and delays to projects.
Those thinking about taking a similar approach must acknowledge several issues:
- Contractors who believe they are outside IR35 are highly unlikely to accept an ‘inside IR35’ contract
- Contractors who do accept an ‘inside IR35’ engagement will likely increase their rates to compensate for the accompanying tax increase
- Firms that rely heavily on contingent labour and cannot afford to pay up to 40% more for contractors must adopt a compliance regime
For these reasons, firms need to consider the risks, such as how dependent they are on contractors and how they stand to be affected by their planned approach to the Off-Payroll legislation. Can they handle the disruption and damage associated with a blanket approach, or is a considered compliance process necessary?
How much time do we have to prepare?
Those opting to comply with the Off-Payroll legislation have until 6 April 2021 to get their house in order, although the timeline for preparation will depend heavily on the length of any contingent engagements.
Contracts that begin before April 2021 but overlap beyond this point present a tax risk to companies that haven’t confirmed the IR35 status of those engagements through adequate preparation and the implementation of robust compliance processes.
This means companies hiring contractors on three-month contracts feasibly have until January 2021 to establish compliance protocols. To afford more preparation time, a company might consider temporarily issuing short-term contracts, an approach that many will likely have already taken given the current circumstances regarding COVID-19.
The message is clear; businesses should act well in advance to afford themselves ample time to establish an effective and comprehensive compliance regime.