IR35- the layperson's lowdown!

IR35 - what's the craic? I am going to deliberately simplify it for anyone having to explain it to a stakeholder, but health warning that obviously this is my personal summary of the issues and does not constitute advice detailed enough to assess your risks as a business (if I had lawyers I think they would probably have told me to say that ??)

Many folks in the in house recruitment world have already asked me since Wednesday's announcement what 'IR35 reform consultation' for the private sector actually means. Maybe not all of the questions were just as polite, but I got the drift ??

The literature on this is a dull and at times contradictory read, to be fair that is in no small part because the regulations themselves as they stand today are unclear and at times contradictory. 

In this short article I am going to try to give you the simplistic low-down to help you explain it to your team and your stakeholders.

Remember though, this is not new legislation. What changed in April 2017 in the public sector and now looks likely to change next year for the private sector is who is ultimately holding what bit of the can...

Today in the private sector the majority of the liability for inappropriate use of 'contractor' tax status is the contractor, who could wind up with a hefty back bill for income tax. Whilst there are still the liabilities for the contractor under the proposed reforms, it would be the business engaging the contractor who decides if IR35 does or does not apply and would get a financial rap on the knuckles (and potentially PR impact no doubt...) if they got it wrong.

If IR35 was deemed by the employer to apply then the contractor's business will be taxed at source exactly as if it were an employee, with the employer being liable for making sure this happens (yes, admittedly simplified again!)

Contrary to what some people are worrying about though this does not mean that a contractor who is deemed to be doing a job that looks like an employee ('inside IR35') will change their employment status. Unless they themselves claimed retrospective employment rights (and that would be a whole other article!) they will not receive the rights and benefits that go with employment such as pension contributions, holiday pay and unfair dismissal rights.

So what is IR35?

IR35 is effectively the tax rule around whether you should be coughing up income tax as a worker instead of selling yourself as a provider of services (steady!). 

It matters to your company if you are engaging day rate contractors or statement of work contractors and, based on the type of work they are doing and how you treat them, HMRC could reasonably argue they look like they are basically a substitute for an employee (Note: a very simplified explanation.)

What does it mean?

Is hiring a contractor to come into the office every day from 9 to 5 and manage one of your teams for 6 months whilst someone is off on maternity leave the same as engaging a contractor (and their company, even if it is only them who works there) to complete an independent assessment of the effectiveness of your performance management processes? 

From HMRC's perspective the answer is likely to be no, if you engage someone to come in and do a job of work that looks, feels and smells very similar day to day to something an employee would be doing then HMRC say they should be paying income tax.

There are very complicated 'tests' that sit around how HMRC would decide if it looked like an employment engagement or not, and over simplifying what these are could land you in hot water so I won't do it here, but organisations in the public sector have introduced detailed questionnaires which they now use for each engagement to help them make the decision.

Charoltte Johns and her team at TfL have introduced a really simple but robust process, using 48 questions that hiring managers and the contractors themselves need to complete, with regular audits 'in assignment' to make sure nothing has changed. This, good folks, is a true modern resourcing function in action - proactively supporting their business in making commercial decisions on how to procure their required workforce and taking accountability for making complex legislation simple but robust in application.

So what's the problem?

Simply put, working as a contractor means more money in your pocket thanks to tax and deductible expenses differences between 'corporate' and 'personal' income tax. HMRC would like the cash back in their coffers, so they want to crack down on companies and contractors they think are dodging income tax and employers contributions.

In many bits of the labour market people with the right skills only want to work as contractors because they make more money that way, and no-one wants to earn less tomorrow than they do today, so the concern for employers is two fold-

1- how do I as an employer of contract workers administrate my accountabilities to decide, and subsequently monitor, if an engagement is inside or outside IR35

2- are my costs going to increase, and if so what do I need to forecast for as a risk to my budget? No-one knows, but plenty of speculation about what might happen https://www2.cipd.co.uk/pm/peoplemanagement/b/weblog/archive/2017/04/10/ir35-tax-changes-already-having-huge-impact-on-public-sector.aspx

So what do I do next?

If you have an MSP talk to them- AMS, Hays, KellyOCG, Manpower and others have specialist practices within their companies to advise on these matters and all have experience in the roll out to public sector earlier this year.

If you use contractors outside of an MSP then do some up front work now. Talk to procurement and get a list of what contractors are being engaged through other vendors or channels. Work together to do a quick and dirty evaluation of any pockets where you think you might have challenges under IR35 and come up with a plan to address your risks.

If this is a big issue for your company then add your voice to the consultation, in house resourcing was massively under-represented last time! To join the conversation as part of the Contingent Resourcing Leaders network contact myself or Jamie Leonard to get linked in.

Last but not least, keep yourself informed, one tip would be to ContractorCalculator CEO Dave Chaplin on LinkedIn for latest views and comments from a contractor's perspective