Blog post

What is IR35?

The legislation was introduced all the way back in 2000, but an update to the rules means organisations are now responsible for deciding the employment status of their contractors. Despite these changes originally being scheduled for 2020, it still came as a shock to the system for many businesses this year. IR35 legislation gavel

The update comes in a bid to tackle non-compliance from employers, ensuring that similar tax is paid by contractors and employees. Before, contract workers could slip through the net and avoid fair levels of taxation. With businesses increasingly relying on short-term contract work, it’s more important than ever that companies have a system in place for managing and retaining contract workers.

Although the timing might feel challenging- businesses have been victim to rapidly shifting requirements during the pandemic and could certainly use a break from the upheaval – it also provides HR teams with an opportunity to design contract management processes that are fit for the flexible future of work.

What are the implications for firms that don’t comply?

The first thing businesses need to know is that a broad-brush approach to IR35 won’t cut it. HMRC are already advising that businesses should pay extra attention to their IR35 decisions and avoid tarring workers with the same employment status brush. Where your team of contractors may appear similar on the outside, the way they do business can differ enormously.

In 2020, 4.4 million people were registered as self-employed, in sectors as varied as construction, media, professional services, and sales. Some will choose to work on a project-by-project basis, others might prefer a 12-month retainer. While a freelance accountant may wish to invoice at an hourly rate, an architect could choose to charge a project fee.

With this level of role diversity within the self-employed workforce, it’s no wonder categorising employment status is a laborious job. Fortunately, HMRC provided some case study examples to support decision-making.

Hypothetical contractor Vasilis is a risk management consultant for a pharmaceutical firm. He falls into IR35 because the business controls where he works, he’s unable to take on additional work due to his contract and his role includes management responsibilities. This means he’s considered to be an employee under IR35.

IR35 Processing

Susan, a freelance web designer, employment status falls outside of IR35, and she’s responsible for handling her own tax. This is because she works for multiple clients, from a location of her choosing, and is paid for work completed (not by day).

Both Vasilis and Susan are service industry contractors, but their business models are quite different when you dig below the surface. And it might seem tempting to lump them both into the same category, but this would be penalised by HMRC.

Even businesses with the most robust management strategy are likely to make mistakes in the early days. What’s most important is that you can provide evidence of comprehensive processes and policies that guide IR35 decision-making within the business. Non-compliance won’t be punished in the first year unless it’s deliberate.

But employers do need to be able to demonstrate that it was accidental and having a standardised system in place for recruiting and managing contractors can ensure your HR team gets all the information they need to make an accurate assessment.

If businesses want to make use of contractor talent, they must have measures in place that ensure IR35 compliance. While fines and penalties are unfortunate, putting off top-tier contract talent with poor management skills could be more damaging to your business in the long run.

The benefits of working with contractors in modern times are that the needs of business change quickly. Having a flexible workforce available on a project-by-project basis is invaluable if companies don’t have the capacity to take on additional employees.

What can companies do to cultivate better contractor management?

With every contractor you hire, comes a mountain of paperwork (or a shared drive full of documents, this isn’t the 90s).

Today, HR platforms provide a central database to manage all workers, no matter their employment status. Centralising this information improves visibility and makes it easier to access for other departments. No doubt there’ll be temporary workers you want to hire in the future, so having their profile and documents to hand will save some admin in the long run. HR teams may not work with every contractor hired, but other areas of the business might need to know the status of their employment.

IR35 workWith good policies in place, HR teams can utilise automation to ensure their contractors are always up to date with the latest details on their employment status. Clear, frequent communication between HR and contractors helps to consolidate the rules and align contract staff with internal policies.

The IR35 rules apply on a case-by-case basis, which means contractor management requires regular maintenance, even for longstanding relationships. Just make sure you define your protocols for determining employment status, so contractors know what to expect, and your business knows where they stand on compliance.

Having a framework in place will enable you to spot discrepancies and fine-tune your procedures so that you can avoid non-compliance. Otherwise, HMRC might ask you to cough up the tax and national insurance payments that should have been made. And those costs will soon stack up.

To many businesses, IR35 might seem like another burden they have to bear in the aftermath of Covid-19. But as more people embrace self-employment and the flexibility that comes with it, companies could lose access to unique talents and skills if they’re unable to properly support the contractor ecosystem. It’s time to embrace the structured approach to contractor management, so everyone can reap the rewards of increasing employment flexibility.

What is IR35? was last modified: September 27th, 2023 by Dee

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