IR35, staying out of the HMRC line of fire!

Posted on Wednesday, February 17, 2021 by Clementina Christopher

If you're of a certain age, you will no doubt remember the golden heyday of contracting.  Stories of largesse were widespread and highly skilled and rare employees were leaving jobs in droves, setting up limited companies and returning as contractors. 

Companies liked it since they could avoid some of the risks and obligations of being an employer.  Employees embraced the opportunity to offset as many expenses as possible to pay less tax.

Things went along fine!  That was of course until HMRC finally pulled the plug bringing off-payroll working legislation changes to the public sector in April 2017.  Public sector bodies were now solely responsible for declaring the IR35 employment status of each assignment undertaken by a limited company contractor.

Under IR 35 you are either in 'deemed employment', inside IR35 and subject to higher tax; or self-employed and outside IR35.  Contractors operating through umbrella companies effectively become employees paying PAYE and avoid the issue of IR35 altogether.  The overwhelming majority of decisions were that contractors were inside IR35 and therefore liable to be taxed under PAYE. 

HMRC is now ready to roll out the same regime in the private sector from April 2021 for qualifying companies.  Companies will need to be very clear on their classifications with potentially high financial risks.  The need to mitigate reputational damage may be even more pressing.  Companies often work tirelessly over many years to build reputation and to be seen as beyond reproach.  It's highly likely there will be some high profile cases appearing in the media which could do significant damage to their brand.

In order to determine whether a company needs to declare its status under IR35, HMRC has issued a litmus test of three key criteria.  If any 2 of the 3 apply you are deemed as part of the scheme and will need to supply the necessary information.

·       Turnover greater than £10.2m

·       Balance sheet greater than £5.1m

·       More than 50 employees.

Companies deemed part of the scheme will need to conduct a thorough audit of their supply chain and carry out role reviews, noting the main factors for consideration including how critical the role is. This will need to be completed on an ongoing basis to assess IR35 employment status.

The next stage is to declare all contractors IR35 status, issuing a Status Determination Statement in the process to the next party in the supply chain, along with an explanation justifying the decision to the contractor.  Companies will also need to have an appeals process in place for any legal challenges.  It is imperative that companies realise that any failures in the supply chain could leave them financially exposed and responsible for outstanding payments.

Although at first glance this could seem overwhelming, there are many sources of expert advice available, to help organisations manage their risk.  HMRC has an online tool to check employment status for tax (CEST).  Solutions providers may also help with all aspects of off-payroll worker engagement from IR35 contractor and supply chain audits, risk review and recommendations through to screening and on boarding, electronic timesheets and employment and IR35 fee-payer solutions.  They may also be able to liaise with HMRC on your behalf and ultimately help with offboarding.

Perhaps the most important takeaway is that doing nothing is not an option. The financial and reputational risk for you and your clients of getting it wrong and the potential additional costs attached require serious attention before it is too late. The government has allowed some time for you to plan but April 2021 is fast approaching!

 

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