Understand the ramifications of IR35 changes for in-house HR, and the five initial steps you can take to help your employer prepare for them
Since April 2021, organisations have been legally responsible for assessing whether IR35 applies to their contractors. If they are deemed to be inside IR35, self-employed workers will now need to pay the same income tax and NICs as if they were employed. But a small survey of HR practitioners1 carried out by CG Pro-Active HR suggests there’s still a significant minority of organisations who have yet to undertake any IR35 status assessments.
Financial impact on contractors
Organisations risk penalties and late payment fines if they are audited by HMRC and found to be using contractors deemed to be inside of IR35. While HMRC has said it will take a ‘light touch’ approach to such organisations and ‘customers will not have to pay penalties for inaccuracies in the first 12 months relating to the off-payroll working rules’, this does not apply if there is evidence of deliberate non-compliance by an organisation.
‘One area of concern raised in the survey is the additional time and costs involved in carrying out assessments and providing training for hiring managers to maintain compliance for contractor engagements,’ says Catherine Glover, Director and HR Consultant at CG Pro-Active HR, which carried out the survey. ‘As a result, 30% of respondents said they had reduced or stopped using contractors.’
‘This is mirrored by an increase in the number of contractors being prepared to decline work where it is deemed inside of IR35 or where the client organisation does not act reasonably in carrying out the IR35 assessment,” she says.
The financial impact of an inside-IR35 outcome on a contractor can be substantial, increasing tax from around 26% of income paid (after costs of running the business are deducted) to 32% of income paid, with no option to claim legitimate business expenses2.
The jump in deductions can be greater still if the client organisation chooses to use an umbrella company to make payments to their contractors. The use of umbrella companies has increased since April, partly so that client organisations can add an extra layer of provider between them and the contractors they engage. This practice is something that raises some concern among tax experts, as it is an unregulated industry.
Paying higher taxes under IR35, but still needing to cover business costs – such as marketing, software licences, indemnity insurance and accountancy fees – is leaving many contractors substantially out of pocket.
‘Paying comparatively less tax has always been an accepted benefit of being self-employed to allow for the uncertainty of being a contractor, covering your own holiday and sick pay, making your own pension provision, and so on,’ says Glover. ‘But now, having work assessed as inside of IR35 removes the financial benefits of independent working without providing the security and additional benefits of employment.’
Considering the recent Supreme Court ruling that Uber drivers are ‘workers’ rather than being self-employed, it’s more urgent than ever that organisations look again at how they engage with contractors. Indeed, one survey respondent (an engineering firm) had chosen to offer employment to all of its technical contractors, rather than continue to work with them on an inside-of-IR35 consultancy basis.3
How organisations should approach IR35
Start by reviewing the work or service needing to be delivered – ask whether it’s urgent, if an existing employee can be seconded or developed to fulfil the role, or if there’s an opportunity for fixed-term employment.
‘If the work or service really is out of the scope of employment, then the organisation needs to engage with their chosen contractor on a business-to-business (B2B) basis,’ says Glover. ‘This can be led by HR practitioners and written into the contract paperwork used, or it could fall to the organisation’s procurement team. Either way, it will also need to be embraced by the organisation’s managers, who will be the vital touch points within the business.’
If managers treat contractors in exactly the same way as employees, then this contradicts any outside IR35 status determination carefully set out ahead of engagement. Glover explains that ‘managers need to understand the implications of inviting the contractor to a team social, expecting them to arrive by 9am every day or asking them to look after a visitor who comes on site, and to see the bigger picture of financial and reputational risk to their organisation’.
Apart from the security of legal compliance, the new IR35 regime may seem to offer few benefits for organisations, which have long relied on self-employed contractors. However, those who use the opportunity to engage with contractors fairly, outside of IR35 and on a B2B basis, will continue to reap the benefits of accessing talented people to supplement their workforce.
1 Total of 22 respondents (9 in house and 13 contractor HR practitioners)
2 Based on standard rate tax payer. Rates will vary according to specific circumstances.
3 CG Pro-Active HR survey respondent (DR)
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Whether you use the services of a consultant or are a consultant yourself, you’ll need to understand the ramifications of IR35 – and what you can do about them