What contractors’ clients ought to be doing about April's private sector IR35 reform - right now
Join us at the meeting? Arrive at five for the audit? Let me have your input on the team’s skills?
All are questions that limited company contractors would normally look askance at if their engager asked them. Too part and parcel-esque for in-business-on-their own-account PSCs.
But contractors, these are not normal times. We’re on the cusp of the biggest IR35 add-on since IR35 itself. And so, the above are all questions you might get asked by your private sector client(s), as they gear up for reform of the Intermediaries legislation from April 2020.
How do we know you might get asked? Because we’re as good as recommending they ask you, writes Colin Morley, director at Harvey Nash Plc.
You’ll probably be pleased to know that there are lots of questions engagers should be asking of themselves too. To give you an idea of what you should expect at the workplace, let’s look at what our recruitment consultants expect those questions to be -- and what we expect engagers should be doing more generally to prepare for this IR35 revamp.
Communication is key
No matter the industry, and we supply contractors to quite a few different industries, communication is the key to getting to grips with this reform -- formally known as ‘Off-Payroll Working in the Private Sector.’
Some UK companies are now holding face-to-face meetings with their contractors. The aim of these IR35 reform ‘tête-à-têtes’ is for engagers to communicate as best they can what the consequences may be for contractors, both personally and professionally. But also financially.
A word of warning, however. Just as the world of social media and instant online news has reared up the phenomenon of ‘fake news’, the same can be said for company developments in response to IR35 changing. Major firms such as RBS and Morgan Stanley taking supposedly ‘pro’ or ‘anti-contractor’ approaches to private sector IR35 implementation have dominated headlines (and many a conversation in staffing circles). For weeks. Yet, we say this rhetoric must be treated carefully.
Audits are auspicious
In our day-to-day dealings at present, we are seeing some companies preparing the right way for private sector IR35 reform. The first sign of this best-practice, well-intentioned approach? Conducting thorough contractor audits, aimed at helping engagers identify four fundamentals:
- Who their contingent workers are;
- What the entities they are engaging with are;
- What the written contracts look like, and finally;
- Where does the money go.
Let’s not forget that a reformed IR35 isn’t the only legislation that clients need to worry about. They also need to consider the MSC (Managed Service Company) legislation, the Criminal Finance Act and AWR (Agency Worker Regulations).
But is an audit enough? Certainly not.
Just as sitting on your hands never results in a job well done, neither will a similar attitude succeed in steering UK business in the right direction come April 6th 2020, when the IR35 tax ‘timebomb’ explodes.
While the UK business market might not be the Wild West, companies up and down the country seem to be waiting with bated breath for some big-name engager to quick-draw from their holster and make a defining, duplicatable decision to either keep, alter or get rid of their contractor relationships.
Not enough companies want to brave the gunfight until Budget 2019, expected be delivered by chancellor Sajid Javid in November, when HMRC will reveal their final hand and show what private sector implementation of IR35 reform is going to look like -- precisely. But will engagers be crippled by the threat of administrative burdens and recruitment challenges if they leave it to the last minute to load their IR35 reform strategy for 2020?
A Futureproof Approach: Our IR35 reform tips for non-small companies that engage PSCs
Here’s what else we say that UK businesses could be doing; should be doing, ahead of next April’s commencement. Our recommendations to contractors’ clients are, broadly, three-fold:
1. Run a robust Contractor Audit
End-users, you should begin with identifying the answers to four questions -- who your contractors are; where they are from; how they are contracted to your business, and what skills they bring to your business. These are all crucial ‘need-to-knows’ for engagers.
How the organisation engages external, off-payroll contractors and the consequences of this for the business, in terms of tax and logistics, is key too. To help you probe further, engagers, here’s another fundamental four questions to pose about your contractors:
- Are they engaged via a limited or umbrella company?
- Is there an agency or consultancy involved in the arrangement?
- Are they based onshore?
- Are they VAT-registered?
Going through these checks (if you’re company that uses contractors), and concluding what the answers are – or aren’t, can help your operation prepare for IR35 compliance in just under eight months’ time.
Running a contractor audit to better understand the detail of your contingent workforce is crucial, and not just for IR35 purposes. The devil is often in the detail and as the 2020 framework isn’t the only legislation to worry about, the asking of specific questions can throw up answers relevant to other rules.
For instance, there’s the MSC legislation and it’s rather unpalatable third-party ‘debt transfer’ provisions. Also, your organisation will be at risk if it doesn’t know for certain that the entities your contractors are engaged via aren’t a façade for some tax avoidance scheme. If this is the case, then quite apart from the MSC rules, you risk falling foul of the Criminal Finance Act. The CFA contains significant penalties for those who fail to prevent tax evasion, as since September 2017 it constitutes a corporate criminal offence.
2. Avoid leaping, procrastinating, blanketing
While end-users who ‘sit on the fence’ won’t achieve best practice for their business or their contingent workforce, leaping out of the blocks too early could result in a repeat of past mistakes. Rushing is not required here. Making sure that you, as an engager of off-payroll workers, make informed decisions for the changes to IR35 in the private sector, is.
Clients, we recommend contractor IR35 status assessments are dealt with on a case-by-case basis, to ensure that such valuable workers are treated fairly, in line with the legislation and not at odds with your outfit needing to retain access to a talent pool.
We believe engagers should not lose skills for their vital projects of the future simply because they neglected to extend fair treatment or ‘reasonable care’ to their contractors. By preparing diligently, meaning not leaving off-payroll working processes and systems to the 11th hour, your operation can adequately deal with the extra administrative burdens that will result from taking a case-by-case approach. It’s a lengthy one, but it’s also the right one.
3. Prepare to flex, assess, dispute and enlist
Looking at the public sector IR35 reform ‘experience’, a readiness to flex and adapt will be vital for engagers to have embedded, come April 6th 2020. In 2017, we saw HMRC making changes to the CEST tool only two weeks shy of the actual official launch of IR35 reform in the public sector! We therefore suggest end-users put everything else they can in place, other than crossing I’s & dotting T’s, while factoring in the taxman’s trend for doing things at the very last-minute.
And clients, there’s certainly enough for you to do. While the draft IR35 legislation for 2020 confirmed that the Small Company Exemption will apply, some changes have been made to the private sector version of IR35, in relation to liability, and disputes. For example, a ‘Client-Led’ Dispute Process is meant to be in place, and this process is tied to another new obligation on engagers – Status Determination Statements.
Some of these additions by HMRC are apparently incoming to avoid IR35 blanketing – that’s the official word from the Revenue at least. But they clearly do add to the administrative headache private sector organisations face to get IR35 reform-compliant. If the CLDP and the SDS elements of the draft pass into law without amendment, companies will have to prepare flexibly as they approach the final commencement date of April 6th.
Engagers, you’ll also likely need to run your own ‘due diligence’ checks, perhaps by enlisting a trusted tax or legal advisory, to ensure you mitigate the risk of ‘carrying the can,’ thanks to the draft containing transfer of liability provisions.
Engagers, what are you waiting for?
We believe that reviewing the working practises of the contingent workforce, understanding the supply chain and the potential tax risks associated with this are actions all affected engagers should be taking now.
As next year’s IR35 reform commencement fast-approaches, businesses should be asking themselves what skills that they need to be permanent /in-house; what outsourced providers they will use for added support, and where in the operation they need flexible labour to grow / reduce, according to business demand.
And clients, if you don’t know the answers to these questions, ask the contractors, consultants, line managers, programme leads or other parties (whether external or not) who do.
Four fundamental actions for engagers to take is our ‘final thought’ --
- Begin preparations now
- Conduct your contractor audit
- Review your working practices and supply chains
- Assess the time, performance and financial/tax issues and implications in good time before April 6th -- because they are numerous.
In short, engagers, why are you still reading?! Go get IR35 reform-ready, right now.
Editor's Note: Read more --