The fallout from the IR35 roll-out so far

The fallout from the IR35 roll-out so far.

After much conjecture and a twelve-month deferral, the IR35 Off-Payroll Reforms have finally been introduced into the private sector.

For those businesses that utilise personal service company (PSC) contractors, the responsibility for assessing whether contractors’ assignments fall inside or outside of the IR35 legislation now falls on them.

Not only is this a change in responsibility for businesses that engage PSCs, but it also comes with an increased possibility of financial liability, should they get it wrong.

So what are the initial reactions following the implementation of the IR35 Reforms?

IR35 – Prepared and ready?

The IR35 Reforms have been much publicised following their introduction to the public sector in 2017. Add in the COVID induced deferral, and businesses have had plenty of time to assess and prepare for the private sector reforms.

However, despite months of advice and guidance from hundreds of sources and angles, predictions and warnings have transpired, and we have seen both engagers and fee payers ill-prepared for the changes.

So far, we have witnessed and heard of cases where engagers of tens, hundreds, and even thousands of contractors have done nothing to prepare for the introduction of the IR35 reforms and not even issued a status determination statement (SDS). 

Alternatively, we have observed many engagers take a broad-brush approach and introduce “no PSC” policies or, more worryingly, make blanket “inside IR35” assessments.

In other cases, we have observed engagers taking the minimal actions possible to assess the contractors. Notably, we have heard of some engagers advising their contractors to conduct their own self-assessment by completing the HMRC’s Check Employment Status for Tax (CEST) test and feeding back results to obtain a status determination.

Whilst we have also witnessed some excellent IR35 work and preparation with some engagers, the volume of stories we have heard or witnessed regarding a lack of preparation is hugely concerning.

What are the implications of poor preparation and bad practice?

Reassuringly, before the implementation of the IR35 Reforms, HMRC announced that the reforms would get a “light touch” introduction, advising that genuine mistakes will go unpunished for the first 12 months following the introduction.

However, engagers should not interpret this approach as an excuse not to take action.

HMRC have issued regular updates over the last two years outlining their expectations of engagers following the reforms, and a lack of preparation is unlikely to be considered sympathetically.

So what are the possible consequences of poor preparation or a lack of action?

Consequences

Valid Status Determination Statements

The IR35 changes state that the engager must make a valid status determination and take reasonable care in doing so. The status determination is required to ensure that the correct taxes and deductions can be calculated and made per the legislation.

If the client fails to issue an SDS or take reasonable care, the responsibility for the deduction of tax and NICs, and the payment of the apprenticeship levy and paying these to HMRC will rest with it. That liability will always remain with the client unless it takes reasonable care in reaching its conclusion set out in the SDS.

Failure to take reasonable care is unlikely to be deemed a genuine error by HMRC and will therefore induce fines and penalties from day one.

Blanket Statements

Making blanket statements is also classified by HMRC as not taking reasonable care, meaning that this approach would also render the engager liable for deductions and penalties where errors occur.

The blanket statement approach is also likely to make the engager less attractive to those contractors seeking assignments outside of IR35, reducing their chances of attracting top talent, meeting work schedules or achieving project milestones.

The potential for reputational damage to the engager as a supplier or employer of choice is significant.

Determination test tools

HMRC released its Check Employment Status for Tax (CEST) tool some time ago, but this has proved inconclusive for many assessments, even in some of HMRC’s own test cases.

Simply directing contractors to conduct their own assessments using the CEST tool is unlikely to meet reasonable care requirements and offers no guarantee against incorrect assessments. 

Again, the responsibilities and liabilities for engagers taking this approach could be severe.

IR35 – avoid the risks

Engagers should not underestimate the benefits of having a defined, robust and compliant process for IR35 assessment.

Those prepared to invest in some simple processes and procedures can quickly and easily mitigate the risks posed by the new legislation.

If you’re looking for help to develop a compliant process or simply keen to maintain best-practice and BAU moving forward – we have plenty more observations to share from the past few weeks.

To learn more about the good, the bad, and the ugly, as well as advice on what Engagers and Recruitment Agencies can do pretty quickly to attract and retain talent whilst adhering to the legislation. You can access a recording of our most recent webinar here – Expectation vs Reality: The Fallout Of The IR35 Roll-Out So Far

Alternatively, for a free, no-obligation audit and assessment of your IR35 compliance process, you can speak directly with Andy Webster, Founder and Director, Workr Compliance, on 07827 810851 or at aw@workrgroup.com.




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Expectation vs Reality: The Fallout Of The IR35 Roll-Out So Far

With the deadline behind us, we’re finally starting to see the ramifications of preparing – or failing to prepare – coming to fruition for engagers and fee payers. Join Workr Compliance and STR Group at 4pm on Wednesday, 5th May for a review of the last few weeks, and key advice for maintaining BAU in the months ahead….

Hosted by Andrew Webster, Founder and Director at Workr Compliance, who will be joined by David James, Engineering Programme Director at STR Group and former IR35 Project Lead at WORLEY, this session will provide actionable insights on:

  1. Continuation of assessing PSCs
  2. Audit of the IR35 programme
  3. Upskilling of new Managers
  4. IR35 legislation updates

The prediction and warnings have transpired; we have seen both Engagers and Fee Payers ill prepared for the changes despite months of advice and guidance from all angles. Whether you’re one of them – or simply keen to maintain best practice and BAU moving forward – we have plenty of observations to share from the past few weeks.

Join us for insights on the good, the bad and the ugly, as well as advice on what Engagers and Recruitment Agencies can do pretty quickly, to attract and retain talent whilst adhering to the legislation…

NOTE: If you cannot attend live on the day, you can still register to receive a free recording after the session.

Missed it? View the webinar recording

  • The password protected webinar recording is available here. Complete this form to receive a password.

    Please see our privacy notice for more information but where your enquiry may include Personal Data please confirm your consent to the use and storage of that data by the Workr Group for the purposes of your specific enquiry as Opted-In below, over and above any legal obligations we may have to store and process your data. You may at any time withdraw your consent by notifying our Data Protection Officer at dpo@workrgroup.com or by using the specific online form.

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HMRC soft landing + IR35 Insurance + preparing for BAU = Confused?

Everything you need to nail the final sprint to April 6th 

Join Workr Compliance and STR Group at 10am on Thursday 11th March to get essential clarity on compliance, insurance and what BAU looks like post April…

Hosted by Andrew Webster, Founder and Director at Workr Compliance, who will be joined by David James, Engineering Programme Director at STR Group and former IR35 Project Lead at WORLEY, this session will provide actionable insights on:

With confusion still evident in the marketplace, Andrew and David will provide clarity to engagers (end clients) on three key areas of IR35: HMRC’s soft landing, insurance and preparing for BAU. They will provide their experience-led advice and best-in-class guidance to engagers going through the latter stages of preparing for 6th April – and indeed beyond. The session will explore the key considerations including what should be done, by when and with whom and provide you with an opportunity to have any burning questions you may have answered. 

With only 16 working days left before the Reform can you afford to miss out? 

NOTE: If you are cannot make it on the day, you can still register to receive a free recording after the session. 

Missed it? View the webinar recording

  • The password protected webinar recording is available here. Complete this form to receive a password.

    Please see our privacy notice for more information but where your enquiry may include Personal Data please confirm your consent to the use and storage of that data by the Workr Group for the purposes of your specific enquiry as Opted-In below, over and above any legal obligations we may have to store and process your data. You may at any time withdraw your consent by notifying our Data Protection Officer at dpo@workrgroup.com or by using the specific online form.

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Demystifying off payroll working for the entire contractual chain (whilst protecting your interests)

Workr Compliance and Markel Tax will be hosting an exclusive webinar, limited to 100 guests on Thursday 18th February from 10am to 11am.

The session will provide specialist insights on:

  • Understanding where the risk/liability lies
  • Anticipated enforcement; practical steps to remain compliant
  • What is IR35 Tax Investigation and Loss insurance and, why is it needed in the contractor recruitment supply chain?

Hosted by:

Andrew Webster, Founder & Director at Workr Compliance, will be moderating the discussion and joined by a leading IR35 and tax insurance expert:

Paul Mason, Head of Tax Partnerships at Markel Tax, will be providing a thorough overview of IR35 Tax Investigation and Loss insurance and the importance of having it in the supply chain.

The majority of Engagers are getting prepared for 6th April legislative changes and, indeed so are Fee Payers. Whilst preparations continue, a much anticipated discussion on indemnification of liability has raised its head over recent months. Workr Compliance and Markel Tax are aware that there is choice in the market for such insurance products, but why not hear first hand of ‘the whys and wherefores’ of obtaining it, in that it is not merely a tick box exercise but evidence of longer term compliance.

Lastly, there is much debate in the market as to ‘who will pay for the insurance?’ or indeed ‘is it actually needed?’ – have a platform to share your views amongst your peers on this subject matter.

Missed it? View the webinar recording

  • The password protected webinar recording is available here. Complete this form to receive a password.

    Please see our privacy notice for more information but where your enquiry may include Personal Data please confirm your consent to the use and storage of that data by the Workr Group for the purposes of your specific enquiry as Opted-In below, over and above any legal obligations we may have to store and process your data. You may at any time withdraw your consent by notifying our Data Protection Officer at dpo@workrgroup.com or by using the specific online form.

Learned through experience, delivering a compliant and robust IR35 Private Sector Reform project….

Workr Compliance and STR Group will be hosting an exclusive webinar, limited to 100 guests, on Thursday 4th February, 4pm – 5pm.

The session will provide specialist insights on:

  • Preparing for 6th April 2021; at what stage of project delivery should you be at with 47 working days to legislative change
  • What are the key components of ‘best in class’ IR35 project and?
  • Identification of probable ‘bottlenecks’ to project delivery on time and, what action can be taken

Hosted by:

Andrew Webster, Director at Workr Compliance, will be moderating the discussion and joined by leading compliance, project management, and employment status tax experts:

David James, former IR35 Project Director at WORLEY and now Engineering Programme Director at STR Group.

Sue Ollerenshaw, Director, Employment Tax Expert

The Private Sector is being told by many stakeholders to ‘prepare’, whilst it is sensible advice, it is potentially not the detailed advice from experience that is being gleaned and, that such detailed advice based on key learnings of delivery would be of greater value as we get closer each day to the 6th April!

The open discussion session will provide a platform for end client attendees to hear, first hand, the genuine challenges likely to be faced of delivering a IR35 project that meets HMRC Reasonable Care’ whilst not affecting day to day operational delivery.

We have a limited number of places available. RSVP by completing the fields to secure your place.

RSVP

  • We will send you an invitation to the webinar on receipt of this submission.

    Please see our privacy notice for more information but where your enquiry may include Personal Data please confirm your consent to the use and storage of that data by the Workr Group for the purposes of your specific enquiry as Opted-In below, over and above any legal obligations we may have to store and process your data. You may at any time withdraw your consent by notifying our Data Protection Officer at dpo@workrgroup.com or by using the specific online form.

IR35 changes – Maintaining a compliant supply chain

With the IR35 Reforms due to take effect in the UK private sector on the 6th April 2021, there has been a lot of speculation about the increase in the use of umbrella companies.

The decision to defer the IR35 changes earlier this year came as a massive relief to many organisations within the temporary labour supply chain. In our article, IR35 – deferred, not defunct! Workr Group outlined how this relief is likely to be shortlived with the reforms almost certain to take effect in 2021.

However, the deferral of the IR35 changes did give a clear indication of the strategies that contract users are likely to take in response.

Responses made in preparation for the original April 2020 IR35 changes indicated that many large scale engagers took an ultra-cautious, although potentially misguided approach.

Policy changes regarding the utilisation of contractors supplying their services via an intermediary (personal services company or Limited Company) or blanket statements determining all contractors as being caught by IR35, appeared prominent. Our previous article IR35 Changes – Blanket Statements Uncovered outlined some of the risks involved in these approaches.

As a result, the Umbrella company solution has been promoted as an alternative by those suppliers under pressure to retain their temporary labour business.

What is an Umbrella Company?

An Umbrella Company will employ a contractor in a similar way to any other employer. The contractor is a permanent employee engaged in working on a number of assignments. They are provided with a Contract of Employment under the Employment Rights Act 1996, granting full employment rights.

The umbrella company contracts with the client or agency and takes care of all the administration matters.

Umbrella companies are used by many contractors because they provide a simple, cost-effective and flexible operating structure.

All income is paid out through the PAYE tax system.

The umbrella will take care of all the administration, tax and payroll work for the contractor — providing insurances to cover the contractor working on an assignment.

The IR35 legislation does not apply to contractors engaged through an umbrella company, making the option more appealing to engagers.

How does the umbrella solution impact engagers?

The removal of the IR35 legislation, and it’s associated responsibilities, is likely to be an attractive proposition for engagers.

However, engagers presented with an umbrella solution should seriously consider the consequences before committing.

Whilst the umbrella solution appears to be the perfect diversion around the IR35 roadblock, there are still risks and responsibilities that the engager cannot relinquish.

Any engager making mass IR35 determinations or blanket statements, or enforcing an umbrella only policy, risk alienating themselves from the talent pool of contractors that legitimately provide their services through a personal service company.

Attracting and retaining top talent is already tricky enough, but contractors are far more likely to be attracted to engagers that offer a fair and considered IR35 determination process.

What are the risks to engagers of utilising an umbrella solution?

First and foremost, the engager still has a responsibility for ensuring that its temporary labour supply chain operates compliantly.

The engager must demonstrate that it has taken reasonable care in the construction and management of its supply chain. Considering reasonable practical ability and competence, this includes ensuring that tax and national insurances are administered and paid correctly.

Failure to demonstrate reasonable care could result in HMRC transferring debts up the supply chain to engagers where taxes are unpaid.

Whilst the umbrella solution is well established, and many providers have operated it compliantly for many years, there are still regular examples of umbrella models that represent tax avoidance schemes in the eyes of HMRC.

Engagers must be confident that such uncompliant models are not being practised and utilised within their supply chains as the financial and reputational risks could be substantial.

What should engagers look out for with umbrella solutions?

A compliant umbrella company should operate in line with UK tax law with contractors becoming employees and income being treated as employment income and taxed via the PAYE scheme. It will provide the contractor with statutory holiday and sick pay entitlements and is also likely to offer additional benefits such as healthcare and insurances.

Engagers should also look out for accreditations to bodies such as the Freelancer and Contractor Services Association (FCSA) – fcsa.org.uk, a self-governing body for umbrella companies that conducts regular and robust audits of its members, Workr Group included.

Umbrella schemes operated by providers with FCSA accreditation are assessed and investigated thoroughly to ensure compliance.

However, there are hundreds of providers in the umbrella marketplace, many operating without governance or accreditation. Subsequently, there have been many examples previously of schemes advertised as umbrella arrangement that, once inspected more closely, have elaborate payment arrangements that do not conform with UK tax law.

In particular, a more recent example has been exposed and labelled as the Mini Umbrella Company or MUC. In this case, hundreds of small limited companies are set up to exploit small business incentives such as the flat rate VAT scheme and the Employment Allowance.

In some cases such as the MUC, even the contractors are unaware of the structure of the umbrella model under which they are employed. It is easy to see, therefore, how difficult it can be for an engager to spot an illegal umbrella model.

What should engagers do now to ensure a compliant supply chain?

We encourage anyone with a responsibility for a temporary labour supply chain to ensure that your due diligence process for checking compliance in the supply chain, is fit for purpose and meets HMRC’s reasonable care requirements.

Whether you engage contractors that provide services via a limited company or are employed by umbrella companies, there are significant risks involved.

Taking a robust, right-first-time approach to supply chain compliance will give peace of mind and confidence to all stakeholders in the process.

HMRC strongly recommends that engagers seek professional advice and assistance in effectively managing the temporary labour supply chain.

At Workr Group our specialist team can offer impartial advice and assistance with all aspects of your supply chain, including our Umbrella solution – Workr Umbrella and our leading compliance service Workr Compliance.




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IR35 changes – blanket statements uncovered

The term ‘blanket statement’ has become synonymous with a specific approach to the impending IR35 changes due on the 6th April 2021, but what constitutes a blanket approach and what are the consequences of getting it wrong?

Perceptions are that some organisations, in the automotive industry, for example, have adopted a blanket approach. However, this is neither proven nor has it been tested in a case of law.

What is clear is that a great deal of ambiguity remains amongst engagers and contractors alike!

IR35 – what does reasonable care mean? Let’s recap

In our previous article, IR35 – deferred, not defunct! Workr Group outlined the changes in responsibilities for engagers along with recommendations on how to achieve reasonable care.

The IR35 changes state that, as the engager, you must take reasonable care in how you go about making an IR35 status determination.

By reasonable care, HMRC means that you must conduct a thorough and detailed assessment of the work to be carried out by the contractor (worker). 

HMRC recommends that you:

  • Formalise and record a consistent process.
  • Seek professional advice and assistance.
  • Involve relevant parties or individuals.
  • Use a determination test tool.
  • Regularly review determinations.
  • Define and communicate a transparent process for challenges.

How does this impact engagers?

Clearly, for companies that engage contractors who provide their services through an intermediary (personal service company or PSC), the IR35 changes will increase in the time and administration required.

As a result, it would appear that some engagers have opted to conduct mass determinations to try to reduce the administrative burden. Making mass determinations for all or large groups of contractors has commonly become known as making a blanket statement.

Previously in the rail sector and more recently in the automotive industry, concerns have been raised about engagers adopting the blanket statement method.

What are the risks of making blanket statements concerning IR35?

Where the engager is deemed not to have taken reasonable care in determining the IR35 status of a contractor, HMRC can transfer any debt for unpaid taxes to the engager

According to HMRC’s Employment Status Manual (esm10014), examples of behaviours which do not constitute reasonable care include, but are not limited to:

  • Determining that every worker who provides their services through an intermediary is caught by the off-payroll working rules without giving any consideration to the specific facts of each individual case.
  • Determining that the off-payroll working rules apply to a large group of workers who have some variations between the work that is being carried out, without giving proper consideration to the different working arrangements for each worker.

If therefore, making blanket statements does not constitute reasonable care, then the implications and risk for engagers are significantly increased.

In the UK automotive sector, for example, some companies engage hundreds, if not thousands of contractors meaning failure to take reasonable care could represent a substantial financial risk.

Additionally, the time saved by making blanket statements is likely to be expended many times over as a result of the high volume of challenges made by contractors in response.

IR35 – does outsourcing the determination process constitute reasonable care?

In the guidelines outlined above, HMRC encourages the involvement of professional advisors in the determination process.

Engagers who utilise such support will be demonstrating a commitment to making fair and reasonable determinations and will likely be looked upon favourably by HMRC and contractors alike.

However, this approach comes with a caveat!

Simply outsourcing the determination process to another party does not relieve the engager of responsibility or liability and may not be deemed as taking reasonable care.

In recent case law; Udlaw Limited v Revenue and Customs (27/01/2020), the tribunal referred to the HMRC Compliance Handbook – CH84540 concerning reasonable care.

The manual states;

A person cannot simply appoint an agent and deny responsibility for their tax affairs. The person still has a duty to take reasonable care, within their ability and competence, to make sure that what they are signing for is correct. The person has to show that they took reasonable care, within their ability and competence, to avoid default by their agent. This will include:

  • Making sure that they give the agent all relevant information with which to work. No agent, for example, can produce correct accounts and returns from grossly deficient records, or give accurate advice if they do not have all the facts.
  • Implementing the professional advice received and not neglecting some vital step.
  • Checking the agent’s work to the extent that the person is able to do so. For example, an ordinary person cannot be expected to challenge specialist professional advice on a complex legal point. But they ought to be able to recognise the complete absence of a major transaction.

IR35 — what should engagers do now?

We encourage anyone with a responsibility for IR35 compliance to ensure that your determination process is fit for purpose and meets HMRC’s reasonable care requirements.

Whilst it may seem time-consuming and burdensome initially, the mitigation of risk and time saved by taking a robust, right-first-time approach will give peace of mind and confidence to all stakeholders in the process.

With the IR35 changes now less than six months away, now is the time to review your determination process!If you have found this useful, then you can find further information on IR35 here.