Are you prepared for off-payroll working reforms?

It was always a matter of time until the public sector off-payroll working reforms (changes to the rules known as ‘IR35’) were extended into the private sector.

So the Chancellor’s announcement in the Autumn Budget was no real surprise. There were, however, some small unexpected positive details included, such as businesses being given more time to prepare than had been expected and the exemption for ‘small’ employers. Nonetheless, this is a huge change to how contractors are engaged.

Many businesses are not prepared for this significant change or are simply ignoring it all together. A theme emerging from our recent IR35 round-table events was that a number of private-sector boards are saying it will “all blow over,” which is concerning given the scale of the risks and costs. The new look IR35 will be pressing ahead and here to stay – and although the draft legislation is yet to be published, we are expecting the rules for private sector employers to mirror those introduced into the public sector in 2017. The government is also gearing up for stronger enforcement, in a similar manner to which they now police National Minimum Wage and National Living Wage.

How can we learn from the public sector reform?
IR35 is not a new concept. However, previously the obligation to consider the legislation sat with the contractor and their Personal Service Company (PSC). This has now shifted, along with the associated risk and potential additional cost of employer’s National Insurance Contributions (at 13.8%), onto any public sector body that is the ‘end user’ of a contractor’s services via their PSC. This makes it easier for HMRC to enforce IR35.

IR35 status is assessed via the normal employment status tests for tax purposes. Where this deems the contractor to be an employee then the ‘fee payer’ (the entity that contracts with and pays the PSC) must operate PAYE on payments to the PSC.

Public sector employers have struggled with the new rules. Some have even taken an overly-prudent approach of putting all contractors onto the payroll. This approach is not strictly applying the legislation correctly, is unnecessarily costly, and has resulted in talent retention challenges and disputes with agencies. HMRC have already announced that they will be considering sanctions for employers failing to take reasonable care in applying IR35, so this approach will likely be challenged in future.

The challenges now facing the private sector: what action is needed?
Understanding, at a senior level, the forthcoming changes and their impact to a business is of paramount importance to enable well-informed decisions to be made. Then communicating this effectively to key stakeholders within the business, including contractors themselves, is crucial in order to ensure a balanced compliant and commercial approach going forwards.

We have already provided proactive employers with assistance in briefing the board, helping them to communicate at an early stage with stakeholders and contractors, and also providing training to the decision makers where the IR35 assessment and existing employment tax status is undertaken in-house by non-specialists.

There is also the practical challenge of accurately assessing contractors’ status for tax purposes and including these on the payroll. Some of our clients are outsourcing the assessment and payroll as a separate ring-fenced scheme, to reduce administrative burden and risk. This is something which our combined specialist Outsourced Payroll team is seeing to be an increasingly popular option.

HMRC developed the Check of Employment Status Tool (CEST) to assist employers comply with the new legislation. However, there are some limitations to the tool, many of which have been acknowledged by HMRC. The tool does not consider the concept of mutuality of obligation, often considered one of the key indicators of employment. In a recent tax tribunal case, the judges also considered the tool’s decision to be incorrect. Therefore, whilst the tool is a helpful indicator as to whether an engagement could be caught by IR35, its output should not be solely relied on.

For businesses using agencies to supply contractors, it’s important to understand the impact on the supply chain and how those agencies may be adapting for the changes. Agreeing the contractual and cost implications is important; as is understanding how the IR35 assessment process and information sharing will work in practice in order to avoid any misunderstanding or breakdown in communication which could introduce additional risk.

What are the next steps for private sector employers?
The first step for private sector employers should be to understand if they will be within scope of the new legislation. For many this will hinge on the definition of small employers which is yet to be formalised, although it has been indicated that this will mirror the definition in the Companies Act 2006.

Next, understanding the extent to which the business is impacted will be crucial. Many employers often don’t have clearly defined responsibility and processes for engaging contractors. This means it can be challenging to gain full visibility of the status-quo, and to work through the complexities of employment status for each contractor and how this will be monitored going forwards.

At Grant Thornton, we have been helping our clients with an IR35 Readiness Check. Looking at the impact and identifying the key actions needed to prepare ahead of April 2020 is fundamental for ensuring any process changes, communication exercises, contract renegotiations and even business model changes, are put in place in a robust manner in good time.

In the meantime, it’s important to remember that contractors engaged directly (i.e. not via a PSC or agency) are also subject to the normal employment status tests. Additionally, overseas PSCs/agencies could pose a risk due to other legislation which can transfer a UK PAYE obligation down the contractual chain.

Please get in touch if you would like to discuss this further or are interested in the IR35 Readiness Check.

Grant Thornton

Grant Thornton is one of the world's leading organisations of independent assurance, tax and advisory firms.

Jim Rogers

Partner

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