Are you wondering what IR35 has in store for contractors?

IR what now?

IR35 has been around for 20 years plus, and was originally introduced as HMRC felt that many contractors and temporary workers were potentially avoiding tax by supplying their services through an intermediary, often a limited company or PSC.

Do HMRC really care about tax?

HMRC, for whom maximising the tax take holds quite a bit of interest, apparently still felt that this rule was insufficient to guarantee compliance. Because the original IR35 rule left the onus on the contractor to decide exactly where they fell within the rules, there was an element of asking turkeys how they felt about Christmas.

What does this have to do with me?

The new toughened IR35 places the responsibility of checking squarely on the shoulders of the employer. To back this up an array of fines will be introduced to ensure that each and every contractor engagement is accurately assessed to decide if it falls inside or outside the new rules.

At least it’s easy to understand the new rules.

HMRC, with the kind of clarity you might expect from a large Government monolith, have introduced a self-check CEST tool for rendering a decision on each contractor’s status. Unfortunately, the first million attempts to use the tool up to December 2020 resulted in ‘no result’ an unsatisfying 200,000 times. For a company trying to do the right thing, develop an accurate understanding of the rules and make sure that going forward they are immune to potential fines and bad publicity, this is not ideal. With a parting recommendation to ‘call HMRC’ if no answer is supplied HMRC apparently feel that they have discharged their own duty.

But I don’t have to think about this for ages yet?

This does leave responsible firms in something of a limbo area. With the April 2021 Tax year change coming up and the new rules coming into force there will have to be an assessment of current contractors, and a determination made for each. Not only does it fall inside or outside of IR35, but also how critical the role is. Will contractors need to be given an enhanced pay rate for it to be viable after April? Add in contractors working through Limited companies registered abroad, or working abroad remotely and the complexity of the decisions facing staff becomes apparent. A rough calculation recently published about the effect on the average contractor of the new rules mean that around 20% more earnings may now be lost through taxation. So, it’s not just future penalties that need to be avoided, it’s important to get it right for existing contract staff in order to avoid paying out needlessly.

So, we’re all doomed?

Thankfully, many contracts can still legitimately fall outside the rules. Over 500,000 of the first million uses of the tool suggested that this was the case. Having said that of course it is vital that rules are not bent to make it fit, in a way that is harder to justify further down the trail. Departments desperate to keep existing contractors on an uninterrupted relationship basis will place considerable pressure on HR departments to facilitate their wishes. Proper advice on how to achieve the right outcome regarding accuracy and cost is something that many companies will need assistance with. Contracts written for roles outside IR35 must support the determination made, and not accidentally undermine the decision. When a role is found to fall within the IR35 rules, correctly identifying the type of contract to use (Worker, zero hours, employment, freelance, fixed term etc) to best serve the company and the contractor is equally important. Systems will need to be in place to carry detailed records of decisions made to refer to later if HMRC investigate and the way that firms see and engage with contractors will likely change as a result.

If it sounds like a minefield negotiating the complexity of all the choices available and your company needs help in getting this right first time, and every time, let us know and we can give excellent advice and support for setting up a process to get this accomplished. 

Debbie Scola is founder of Cerulean, a specialist HR Consultancy and an accomplished Human Resources Director/Consultant with a track record of transformational Business, Cultural and Digital change. She is also a trusted coach, facilitator and advisor.

Email: [email protected]

Tel: +44(0) 7425 739906

Website: www.ceruleanltd.com

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