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?
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.
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 firstname.lastname@example.org.
Our staff regularly write about subjects that interest them in ways that will interest our clients. Sign up to our newsletter and receive notifications when new content is added.