Joanne Harris, technical commercial manager at First Freelance says early preparations are key for implementing IR35 changes.
The UK government published the draft legislation for the 2020 finance act on 11 July 2019, which included much-anticipated reforms to the IR35 legislation that have caused concern for contractors, recruitment agencies and end hirers.
The reforms shift the responsibility for determining the IR35 status of an assignment from the contractor to the end hirer, similar to public sector changes in April 2017. While contractors and their accountants have been grappling with the complexities of IR35 since 2000, this is new territory for most end hirers and has understandably caused uncertainty.
It’s essential for recruitment agencies and end hirers to prepare for the changes sooner rather than later. Developing a thorough understanding of how you will be affected is critical.
The following steps provide an overview of the key considerations that need to be made:
- Develop a supporting business strategy
A business strategy should be implemented by recruiters and end clients when using contractors. Reviewing the day-to-day working practices and contracts throughout the supply chain is essential, along with ensuring that payroll software can cope with the changes.
Companies should identify the number of workers in scope, undertake a full impact assessment on their business and develop and implement a robust process for making correct status assessments.
- Maintain a duty of care
End hirers must exercise reasonable care when determining the IR35 status of an assignment; this is explicit in the legislation, although a definition of what constitutes reasonable care is not. Companies must assess each contract individually so that an accurate status can be achieved – blanket assessments are not acceptable.
The reforms also introduce a requirement for the end hirer to provide a Status Determination Statement (SDS), and until this statement is passed on to the next party in the supply chain, the end hirer retains the fee payer responsibilities. Recruitment specialists working with medium-large businesses should ensure companies are aware of their obligations from the offset. Where a contract falls inside IR35, correct protocol for paying tax and national insurance must be followed and is the responsibility of the fee payer.
This means that when a recruitment agency is making a payment to the Personal Service Company, where the Status Determination Statement confirms the assignment falls inside IR35, the recruitment agency will be responsible for deducting the relevant tax and national insurance.
- Build a comprehensive understanding of IR35
End hirers must be able to make accurate status assessments and avoid a blanket approach to determinations, otherwise the status determination statement will be invalid, and the fee payer responsibilities will remain with the end hirer. To avoid this, companies may turn to recruiters, who are considered trusted experts, for guidance. Knowledgeable recruiters will be able to advise clients on how best to prepare and proceed.
- Audit your supply chain
HMRC believe the first agency in the supply chain is best placed to improve compliance down the contractual chain. It is really important that both end hirer and the first agency understand how the transfer of liability works across the supply chain, as the new legislation includes debt transfer provisions.
HMRC stated that any liability will, in the first instance, sit with the party that experienced the compliance failure. This could be a failure to pass on a status determination statement or make the required deductions as fee-payer.
If HMRC is unable to recover the debt from this party, they will seek to recover it from the first agency in the supply chain and if this is not possible, they will seek to recover it from the end hirer. Therefore, it’s imperative that adequate due diligence is completed on the supply chain.
- Appoint an IR35 specialist
Selecting an IR35 specialist, who is knowledgeable of how to roll out these changes within your organisation will be key to ensuring a smooth transition.
For end hirers, appointing an expert to conduct reviews of contracts and working practices will demonstrate reasonable care. Those working in recruitment will undoubtedly have questions and require some guidance on these complex changes. It would be beneficial to have an expert head up the internal training process and increase knowledge across the company.
- Communication and collaboration
Without question, communication is key, both internally and externally. Expertise must be cascaded through recruitment firms so that all employees understand IR35 and how it affects their roles. Similarly, the communication between recruiters and their clients is imperative so companies know what is expected of them.
A coordinated effort between all parties is required to drive compliance, while avoiding any associated disruptions that may arise. Consider whether changes to contracts or working practices throughout the supply chain are necessary and seek to redraft, restructure or renegotiate arrangements where appropriate.
A lack of knowledge on IR35 could lead to major difficulties for businesses and recruiters. Blanket assessments could prove very damaging and fail to meet the reasonable care requirement, which is a fundamental factor of the new legislation.
A failure to appropriately prepare for these changes could also potentially mean a loss of business for recruitment consultants and loss of talent for their clients.