There is now less than a year to prepare before the introduction of the new off-payroll rules for the private sector. Contributor Julian Cox, Head of Employment – iLaw.
Known more commonly as IR35, the rules are currently already in place within the public sector, where they have already sparked considerable controversy and several high-profile cases in the First Tier Tribunal – including successful appeals lodged by TV presenters, such as Lorraine Kelly.
However, from April 2020, where an individual is engaged by a medium or large-sized business in the private sector and works through a company, the employer will be responsible for assessing the individual’s employment status under the IR35 rules.
Where the rules apply, the business or agency will be responsible for deducting income tax and National Insurance contributions (NICs) via PAYE and will be required to pay employer NICs.
It is estimated that almost a quarter of the UK’s workforce now works on a contingent basis as a contractor or consultant, either in the public or private sector and that the rules could lead to multiple requests for higher rates of pay or more permanent full-time roles to better reflect the requirements of IR35.
So far, many publications have focused on the employee-based elements of the new rules, but the cost and responsibilities enforced on employers is also significant and should not be underestimated or ignored.
To help employers prepare for the IR35 rules, here are five top tips that they should follow:
1: Research and Identify
The first step in preparing for IR35 is to conduct a full review of all staff and contractors currently working within a business to try and identify which are bound by the new rules.
Businesses will be able to use the Check Employment Status for Tax (CEST) service, which is available to help businesses determine whether the off-payroll working rules apply.
You can check employment status if you are a worker providing a service, a person or organisation hiring a worker or an agency or recruiter that’s placing a worker.
When considering the status of an employee you will need to consider:
- What are the worker’s responsibilities?
- Who controls the individual (i.e. when, where and how do they work)?
- How they are paid?
- Are they directly in receipt of any benefit or expense?
However, this test is not infallible and recent decisions in the UK’s Tax Tribunals have suggested that they may not be 100 per cent effective at determining status in every scenario, which is why additional professional assistance could prove pivotal.
2: Consider contracts
One of the key elements of deciding whether IR35 should be applied to a worker is their independence from the business and whether they are free to pursue other work outside of the company by which they have been hired.
Effectively this comes down to the element of control that a business or recruitment agency has over the employee.
Where it is clearly evident that they can apply whatever control required, such as the specific hours worked, the location of work or even what a person should be wearing during work (excluding apparel required under health & safety law) then HM Revenue & Custom may assume that despite being seemingly self-employed via their own private service company (PSC) they are in fact an employee of the business, whether temporary or not.
Many of these elements of control are often stipulated under a work contract and this document could, therefore, determine whether the off-payroll rules apply.
Should you wish to maintain a similar relationship with a contractor then it may be worth reviewing their existing contract, roles and responsibilities to ensure that they are sufficiently distanced from the business so as to be truly self-employed.
3: Work out the costs
With so many workers likely to fall within the scope of IR35, it is important that employers take the time to consider the true cost to their business, as well as the additional payroll burden.
A review of the costs, in particular the employer’s National Insurance Contributions, may reveal that it is no longer economically viable to have as many contractors or consultants working under the new rules.
In such a situation it may be far more sensible to terminate existing work contracts in a legally responsible fashion prior to the rules coming into force.
It is important that this conducted ahead of the rules change as recognising them as employees or workers rather than contractors may result in formal redundancy procedures, which could prove costly and time-consuming in itself.
It is important that the termination of these work contracts is done in accordance with the current legal framework so as to avoid litigation in future.
4: Protect the truly self-employed
HMRC has made it very clear that IR35 is not intended to target people who are truly self-employed and yet anecdotally many of those caught out by the new rules in the public sector had previously considered themselves to be self-employed.
Evidence suggests that some large employers have taken a blanket agreement to include all contractors under the rules to avoid a penalty or reputational damage. Unfortunately, for some employees, this means that they have been unfairly included within the scope of IR35.
Employees should take a cautious approach when applying the rules and take time to identify each person’s status on an individual basis.
Applying the rules inappropriately could lead to conflict with key members of staff and has the potential to lead to litigation against a company if a worker feels their new status means that they are unable to work for the business in future.
5: Implement new recruitment procedures
Businesses should also consider their position regarding the recruitment of new workers. Adverts should make it clear whether the role is for a contracted period of work conducted by a self-employed individual or whether it is intended as a more permanent internal role as a consultant or contractor.
By being clear from the outset, those applying for a role should be able to appreciate whether or not they are likely to be bound by the IR35 rules and you as an employer can ensure that their payroll is conducted properly from day one.
Businesses must not underestimate the impact of IR35 and must begin taking steps now to ensure they are ready to apply the rules from April next year.
By conducting the necessary checks and putting the correct procedures in place now most employers should be able to avoid any potential liabilities, while also ensuring that the contractors that they work with are fully aware of how the change will affect them.
Communicating these changes to your workforce are an important element of conducting all the changes and it is where seeking the assistance of a professional, such as a solicitor, could prove extremely beneficial as we are able to utilise our specialist skills and expertise in advising both employers and individuals in relation to the new rules and the steps they need to be taking.