The way that businesses hired contract workers used to be relatively straightforward. That was until April 2020, when IR35 (Inland Revenue 35/ Off Payroll Rules) was brought in by the UK government.

The tax legislation was designed to identify contractors and companies that were avoiding paying the appropriate tax by working as ‘disguised’ employees or those engaging workers on a self-employed basis in order to disguise their true employment status. Under the rules, by operating inside IR35, workers must pay the same tax as an employee, while those operating outside of it are usually directors of their own business and as such pay corporation tax and usually pay themselves through mechanisms such as dividends. 

Added to that, in April 2021, the responsibility for setting the IR35 status and paying the relevant tax was shifted from the contractor to the organisation that is using their services. The penalties for non-compliance can be severe, first involving a long and detailed investigation, the outcome of which depends on the amount of tax the worker should be paying. All this has caused a major headache for employers recruiting temporary staff.

But there are steps that firms can take to make sure that they can continue to hire contract workers while remaining compliant with the legislation at all times. Here is a handy and simple guide to everything you need to know in order to achieve that.

How to ensure hiring best practices
Despite the changes resulting from IR35, the hiring process remains the same. That means human resources (HR) teams and departments are still responsible for advertising for required roles and finding the right contractor to do the work, as they have always been.

They also have to ensure that they are fair throughout the recruitment process, choosing the candidate based on merit and not being influenced by bias or discrimination. Once the worker is in place, they need to provide them with clear briefs that have realistic deadlines and expectations, as well as offering them a reasonable wage, paying them promptly and showing appreciation for their work, while maintaining a polite and professional manner throughout any interaction with them.

Building mutual respect goes a long way. By holding the contractor to the initial agreement you have established and honouring that by paying them on time and the promised amount if they meet the required brief and timeframe, you can quickly develop a strong and long-lasting trust and partnership that benefits both parties.

How to comply with IR35
The main purpose of IR35 is to eliminate tax avoidance while protecting a contractor’s rights. This is achieved by ensuring that only legitimate workers operate for the business through their own limited company or personal service company.

In order to make sure that they remain compliant with IR35, organisations must keep up to date with the latest changes to the legislation and understand how they will impact their business. That requires HR professionals to ensure that workers are paying the right level of tax and their rights are upheld.

To achieve that, HR teams need to be provided with the necessary training and resources to make sure IR35 is being met. This may include, but is not limited to, in-house training or courses delivered by external providers such as the Chartered Institute of Payroll Professionals.

How umbrella companies can be a solution
The best solution may be to use a reputable and compliant umbrella company to do the work for you. By taking on all the administrative tasks and legal responsibilities, the firm can instead focus on its core business and adding customer value, while continuing to remain compliant with the legislation and hiring contract workers.

Given the ever-changing nature of IR35, it’s vital that HR departments keep up with the latest adjustments to the legislation. But, by using an umbrella company, that does away with the need for all that, acting as the middleman between the company and the worker to put their mind at rest they are constantly remaining compliant.

The process is quick and easy. Once HR has identified the right candidate for the job, they let the umbrella company know their details.

From there, the umbrella company draws up the worker’s contract, in doing so, establishing their terms and conditions and rights. The umbrella company then makes sure that the contract is signed by both parties, the worker is being compensated the right amount, the appropriate tax is being paid and their rights are always being observed.

To ensure that the organisation and worker are remaining compliant with IR35, the umbrella company receives payment from the business, which is subsequently transferred to the worker. That frees up the HR team to concentrate on other pressing projects instead.

What the outlook is like for IR35
The results of the latest IR35 changes have been encouraging so far. A total of 37% of those we surveyed as part of our research into the legislation said that their experience of the new reforms had been positive, while only 20% claimed they had been negative.

Contractors are similarly upbeat about using umbrella companies, with 70% saying that they have considered using one to avoid running into difficulties with IR35. However, there’s still some way to go in terms of their adoption, with just 30% having actually done so.

The bottom line is that IR35 has transformed the recruitment process for contract workers across multiple different businesses and industries. But, if firms understand and comply with the latest changes, employing the services of an umbrella company, they can take advantage of the many hiring opportunities open to them.