12 steps to Off-Payroll (IR35) compliance

By Dave Chaplin is CEO of contracting authority ContractorCalculator and  IR35 Shield.

Recently, we have seen a rush of companies, notably in the financial services sector, set out plans to phase out their use of self-employed workers who operate via limited companies in the light of the looming new Off-Payroll tax legislation that is due to hit the private sector in April 2020.

The reforms have certainly prompted firms to reconsider how they engage with their workforce and some have discovered instances where they had long-term contractors working with them who have been happy to convert to full-time employment.

However, the banks are a very special case because they cannot reclaim much of the VAT that is charged to them by contractors. So, by putting them on payroll, they can potentially save the VAT, and can use that to pay the extra employment taxes that are due under the new reforms – which is actually less than the VAT.  For those firms that are unable to offset VAT, this strategy isn’t available to them.

For the changes in banking, the overall effect on the Treasury is likely to be a reduction in tax take, particularly because banks are offering reduced rates, typically cuts of 25%, in conjunction with the changes – but policymakers are blind to this.  The effect on the hiring firms will see them struggling to hire the top talent and skills they need for projects and, in instances where they need highly sought-after skills, they will undoubtedly discover that hiring contractors on payroll will cost them significantly more. Rate rises for in-demand contractors will be inevitable as the flexible workforce shrinks as part of its rebalancing.

Decisions made by the global banks could be seen to be a kneejerk response to legislation that they simply do not know how to navigate and we have seen other firms take blanket ban decisions to not engage contractors – whilst this could be considered an overly cautious approach, for them it’s more of a strategic one and makes some sense.

Off-Payroll compliance will prove crucial to a company’s continued engagement of contractors, who will naturally seek engagements where they can secure a fair and accurate IR35 status assessment, creating the opportunity for an ‘outside IR35’ contract.

A diligent, structured approach to compliance not only mitigates risk and appeases contractors, it also minimises the administrative and cost burden of complying with the rules.  Here isa four-stage, 12-step strategy enabling companies to achieve exactly this.

Stage 1: Identify

Step 1: Collate

Depending on the size of a firm’s contingent workforce, the burden of assessing each contractor for IR35 might seem daunting. But only contractors trading via a limited company need to be considered under the Off-Payroll rules – this could be a small portion of the workforce. To find out, we advise that clients send a spreadsheet to their recruitment partners to complete, detailing the operating structure used by each contractor.

Step 2: Explore

Meanwhile, evaluate your contractors and group together those who have similar contract templates or working conditions. At this stage, your chosen Off-Payroll compliance solution or provider should help identify those who may pose a significant IR35 risk and inform on whether it’s practical to change the working conditions in some cases to mitigate IR35 risk across your workforce.

Step 3: Segment

Having undertaken the previous two tasks, and having received completed spreadsheets from your recruitment partners, you’ll now know the size of the task at hand. For example, if the majority of contractors posing a high IR35 risk are engaged via umbrella companies, your compliance burden will be far smaller than if most operate via limited companies.

Step 4: Assess

Your next step is to assess your affected contractors for IR35. An IR35 assessment requires the assistance of a compliance solution or provider, and needs to gather information from the contract paperwork, the working conditions and the contractor’s details. Ideally, you’ll want to address individual areas of the assessment to the relevant parties, to ensure accurate assessments while sharing the compliance workload.

Stage 2: Analyse

Step 5: Risk profiling

The Off-Payroll rules also require hirers and their recruitment partners to police their contractor supply chains. This is due to the liability transfer provisions, which permit HMRC to pursue hirers and agencies for unpaid tax in the event that another intermediary has been non-compliant. Many tax avoidance schemes operate under the guise of ‘umbrella companies’, so beware of intermediaries with no professional accreditations, or whom market information suggests may be dodgy.

Step 6: Modelling

Conducting status assessments will help you to find answers to a number of critical questions, such as:

  • What is the accumulative employment tax liability for ‘inside IR35’ contractors?
  • What status factors are common across the firm, causing risk?
  • What projects are at most risk?

Answering these questions will help inform a sound strategy to mitigate any damaging financial impact posed by the Off-Payroll rules.

Stage 3: Plan

Step 7: Engagement 

The Off-Payroll rules will cause many companies to review their engagement options. One reason is because direct engagement of contractors deemed ‘employed for tax purposes’ creates a heightened risk of employment rights claims. Clients may seek to insert intermediaries into the arrangement to mitigate this risk, at which point they will need to consider their chosen model of engagement.

Step 8: Policies 

Having considered some of the previous steps, you will now be well placed to establish some policies for the supply and engagement of contractors going forward. For example, you might ask yourself:

  • Should ‘inside IR35’ contractors be allowed to contract via limited companies?
  • Should we restrict the umbrella providers that contractors can operate through?

Step 9: Finance

Similarly, having conducted some financial modelling, you will now be ready to establish a financial plan for your workforce. This might involve exploring potential legitimate policy changes in working practices to secure the ‘outside IR35’ status of contractors. Where this isn’t possible, depending on your budget, you may need to make some big decisions, such as:

  • Which contractors will be difficult to retain ‘inside IR35’?
  • How much would it cost to retain key individuals?

A financial plan will help you to prioritise expenditure to ensure that projects continue to run as smoothly as possible.

Stage 4: Implement

Step 10: Communication

Communication with contractors is critical. Speak to those deemed within scope of IR35 in groups to establish what their plans are. Making it clear that you have conducted a considered IR35 status assessment may mean that some are more inclined to continue working for you. In turn, their feedback will help you update and refine your strategy accordingly.

Those who are leaving will require termination notices. You will also need to serve termination notices to ‘inside IR35’ contractors who are staying, before offering them an alternative method of working. Also, make sure all outstanding invoices are paid. All of this needs to be achieved by the end of March 2020.

Step 11: Alignment

You must communicate policies established in step eight to your recruitment partners, as they will play a crucial role in implementing them. As well as explaining your plans, you will need to establish a deadline. We recommend allowing at least a month’s notice, to give recruiters time to notify suppliers that aren’t on your Preferred Supplier List (PSL).

Step 12: Monitor

Sustained monitoring of your workforce is key to compliance, to ensure that working practices continue to reflect the written agreement, negating any potential IR35 risk. Each contract renewal should be accompanied by a new status assessment. Similarly, keep an eye out for analysis of the latest IR35 court cases. Some may set future precedents impacting employment status case law, which could affect your current workforce.

The benefits of structured Off-Payroll compliance

Compliance with the Off-Payroll rules is not only a legislative requirement, but also key to the continued engagement of valuable contractors. Implementing these 12 steps will help ensure continued compliance with the Off-Payroll rules, while minimising the associated workload in the long-term.

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