The long-awaited announcement of the IR35 reform in the private sector finally landed in the Autumn Budget 2018 speech on Monday 29th October. From April 2020, changes to the IR35 off-payroll working rules (introduced for the public sector in April 2017) will be extended to large and medium-sized businesses in the private sector.
It had been widely anticipated that the reforms would come into force in April 2019, and while the delay to 2020 offers some breathing space for companies to plan, prepare for and implement change, the size of the task should not be underestimated. At the moment, details of how the new rules will look in the private sector have not been released. We expect the government to provide greater clarity over the next year, however in the meantime, here’s our guide for getting your business ready for the IR35 reform.
What you need to know
In a nutshell, the off-payroll working rules, often referred to as the IR35 rules, are aimed at cracking down on tax avoidance from ‘disguised employees’. The rules were originally introduced in 2000 to ensure that those who work through a personal service company (“PSC”) who would have been employees if they were directly engaged, pay broadly the same employment tax as if they were employed. There are a number of conditions and criteria that need to be looked at in order to determine whether a role would be deemed to be ‘in-scope’ for IR35.
HMRC has created the Check Employment Status for Tax (“CEST”) tool which can be used to assess whether a worker would be classed as employed or self-employed. The tool looks, for example, at whether someone is under the supervision of the end user, what level of control an individual has over their working arrangement (e.g. hours, location), whether there is mutuality of obligation (e.g. continuous work) or whether someone is personally expected to complete the work with no substitution.
Under current IR35 rules in the private sector (and previously in the public sector), it is the responsibility of the PSC to determine whether an individual falls within the scope of IR35 and therefore has the obligation to operate PAYE and NIC where necessary. HMRC has estimated that around one third of individuals working through a PSC should fall within the IR35 rules and be taxed as an employee, but that within this population only 10% are being taxed in the right way. This means that some individuals are not paying the right employment tax and NICs and some employers are not paying the right employer’s NICs.
In 2017, HMRC introduced reforms to the IR35 rules in the public sector which meant that the onus for determining whether a role should be deemed as inside or outside of the scope of IR35 fell to the end user (i.e. the public sector body), not the PSC as it had done previously. The obligation to operate PAYE and NICs consequently rests with the public sector bodies and their suppliers, leaving them open to potentially heavy penalties for failing to comply. The fallout from this decision is still hotly contested, with public sector bodies calling it a success and a disaster in equal measure. Similar measures are now set to be imposed on the private sector from April 2020, although we await full details of what these will look like in practice.
Understanding the make-up of your temporary worker population as early as possible is key. If you have a vendor management system in place this will help you to identify your existing PSCs/intermediary companies, in turn helping you to drill down into their contract arrangements. The IR35 changes will not just apply to new arrangements, but also to existing workers as of April 2020, which will make it far more time-consuming and complex to implement so it is vital to use the time between now and April 2020 to get a head-start. Analysing your existing workforce can help you to determine your level of risk, and put in motion mitigating steps.
It also pays to be clear with all parties from the outset. Without honesty between your PSCs, business users and recruitment partners it will be difficult to be objective, leaving a wide margin for error. Speaking to your existing PSCs can also help to manage damage control, simultaneously providing reassurance to those affected and also helping to have open conversations with those who may oppose any changes.
Communicating with both current and future PSCs can save time, confusion and even cost in the long-run. Discussion with your recruitment partners will also drive positive behaviour around transparency. Recruitment partners can be valuable resources for educating and challenging hiring manager behaviour around correct PSC use or for conveying opportunities to candidates that may be less informed on IR35, ensuring better access to talent.
IR35 may have knock-on effects for your entire business, not just your recruitment and HR team. Hiring managers, for example, will need to be aware of the criteria which determines whether a role is inside the scope of IR35 or not, such as reporting lines, responsibilities and working terms – the most decisive of all will be the degree of supervision and control exercised by the end user. All of this information will need to be considered at every touchpoint in the candidate journey in the build up to April 2020 – from creating and signing off job descriptions to managing PSCs on an ongoing basis.
Investing in company-wide training is therefore instrumental for managing IR35. Engaging specialist help will ensure that any company-wide training is accurate and up-to-date, mitigating any risk to processes. This may include engaging a consultant to run a risk audit, a training provider to educate or a recruitment partner to challenge hiring managers on resource use and ensure that from April 2020 candidates are aware of each role’s IR35 status before interviewing. There are also numerous online sources with invaluable tools and tips for managing IR35 which can help you stay abreast of any developments and support the evaluation process.
Planning for IR35 also means considering how the new rules may impact your wider business. Talent leakage is one of the biggest threats, already sorely felt by the public sector in 2017. The implementation could drive many existing workers into early retirement, permanent working arrangements, smaller businesses or even overseas as Brexit takes hold. At the same time, the industry could see significant price hikes as workers seek to charge higher rates to increase their take home pay, creating a toxic environment for businesses with ambitious growth plans.
For medium and large UK-based businesses with numerous projects, large temporary worker populations or operating in skill-scarce markets, it may be time to consider new arrangements for sourcing talent. We believe that the changes in the IR35 rules in the private sector may trigger a structural change to the existing employment landscape. For some businesses, alternative sourcing models such as Statement of Work and Employed Consultant Models may be a viable option, while traditional managed service provider models (MSPs) can offer some safeguards when it comes to properly qualifying roles and locating talent in tough markets at reasonable cost.
At the other end of the spectrum, investing in emerging talent and upskilling your existing workforce could help to bridge any future skills gaps. Diversifying your portfolio of talent solutions should therefore be on the discussion table amongst your stakeholders in the coming months, please get in touch with us if you would like to understand more about the talent solutions that are available to your business.
The IR35 private sector rollout will not start having a real impact for another 17 months. We should see this as both a blessing and a curse. On the one hand, it offers an excellent opportunity to adapt to the changes with time and consideration – a luxury which was not afforded to the public sector. On the other, this time period could lend a false sense of security and cloud immediate decision-making, meaning that long-term consequences may not be considered until too late. These tips serve as a platform to begin discussing IR35 at the earliest opportunity with everyone who is affected. Communication, consultation and strategic thinking are key to navigating the reforms.
Keen to get a handle on IR35 early? Please email firstname.lastname@example.org to find out how we can help you – whether that’s helping you to understand and analyse your existing temporary worker population, gain specialist advice on the reforms, or discuss suggestions on how you can future-proof your business.