By Dave Chaplin is CEO of IR35 compliance solution IR35 Shield

We now know for certain that the Off-Payroll legislation will take effect from April 2021. Whether you’re a client, an agency or a contractor, it is vital that you take steps now to mitigate against the damaging impact and costs of the new rules so that all parties can continue to enjoy the mutual benefits of flexible working. Dave Chaplin is CEO of IR35 compliance solution IR35 Shield and author of IR35 & Off-Payroll Explained and here he explains how best to prepare.

Preparing for the reform – hiring firms

The Off-Payroll legislation requires hiring firms to determine whether thousands of contractors can continue to operate as they have for decades. The new rules require hirers to conduct an IR35 status assessment of contractors and inherit a degree of tax risk depending on whether they have taken reasonable care in reaching their conclusion. However, the impact of the Off-Payroll legislation for hiring firms stretches far beyond this.

Hirers will, under these new tax rules, be required to pay the employment taxes due on the earnings of ‘inside IR35’ contractors because agencies simply won’t have the financial resources to cover these extra taxes. When you consider that roughly 80% of the additional tax now due from an ‘inside IR35’ engagement under the Off-Payroll legislation is composed of employment taxes, this is a significant cost to bear.

Inability or failure to offer contracts on an outside IR35 basis also threatens:

Contractors increasing their rates to counter their own tax loss

Employment rights claims from contractors deemed ‘employed for tax purposes’

Struggles to attract talent as contractors look elsewhere for outside IR35 contracts

Firms are also required by the legislation to demonstrate ‘reasonable care’ in reaching the conclusions in their status assessments, which is actually the easiest of the challenges to overcome.

Establish your firm’s IR35 risk

The first step is to acknowledge that Off-Payroll compliance will create an ongoing administrative overhead which your firm will have to plan for, whether status assessments are outsourced or conducted in-house.

The second step is to establish your firm’s IR35 risk by assessing your contingent workers.

The significant compliance challenge posed by the Off-Payroll legislation has necessitated innovation by way of automation. Firms tasked with assessing status and maintaining compliance for vast numbers of engagements need solutions that provide immediate assessments and assistance with the more trivial tasks.

When considering online solutions, bear in mind:

Are the Status Determination Statements (SDS) detailed and comprehensive? Does the solution continue to monitor ‘outside IR35’ engagements throughout the contract for added protection? Is the service insurance-backed? Does the provider have demonstrable expertise in IR35 and employment status case law? Are the solution’s assessments demonstrably consistent with historical IR35 tribunal outcomes? Can assessments be instantly turned around? Can the solution provide real-time tax calculations to enable hirers and agencies to understand their impact? Does the solution make evidence gathering easier?

It is important to establish the credentials of any provider. Almost overnight, a new market for IR35 expertise has sprung up, populated by many unqualified providers without the essential pedigree of legal expertise required.

The importance of enlisting a quality compliance solution or service provider can’t be underestimated. Remember, to gain access to the best contracting talent, you will need to engage contractors on an outside IR35 basis. It’s imperative that any chosen provider doesn’t present a risk to your organisation.

Create contracts and working arrangements that mitigate IR35 risk

Once you have established the greatest risk factors threatening the outside IR35 status of your contractors, these need to be addressed in the contracts and working arrangements. Mitigating these risks reduces the chances of contractors withdrawing from a proposed contract over IR35 status while further minimising your risk of tax liability.

The working arrangements must reflect the written contract and reality. Past tribunal cases have exposed sham contracts, the unrealistic clauses in which are often referred to as ‘window dressing’. If an engagement is firmly caught by IR35 and the proposed contractual amendments aren’t realistic in practice, you will have to accept that the position can’t be rectified.

Insure yourself

At this stage, you will have addressed the assessment status, helping to fulfil the ‘reasonable care’ requirement while mitigating your tax liability risk if HMRC investigates. However, for stronger protection, make sure the provider you work with can offer access to insurance policies for ‘outside IR35’ determinations.

Watertight IR35 compliance practices won’t necessarily deter HMRC from fishing via an investigation, so taking out appropriate insurance will ensure that any investigation costs and liabilities required to defend an investigation by HMRC are covered.

Ongoing monitoring

Ongoing monitoring and evidence gathering throughout the engagement are other crucial compliance processes. With the Off-Payroll legislation effectively dictating that IR35 status assessments be conducted prior to the beginning of the contract; parties must take measures to ensure that the working arrangement continues to reflect the original status determination.

Preparing for the reform – agencies

The preparation required by recruitment agencies is two-tiered. On one hand, as the intermediary, agencies will be expected to contribute to the IR35 compliance process and help negotiate compliant outside IR35 assignments. On the other, agencies will need to identify and implement processes to calculate, pay and report taxes for contractors deemed caught by the legislation.

Though hiring firms are ultimately tasked with assessing the IR35 status of their contractors, they will rely on recruitment agencies to help develop a solution. The input of agencies into this process is especially important, given most engagements consist of two contracts, both of which the agency is involved in – the upper-level contract between the hirer and agency and the lower-level contract between the agency and contractor.

Assist in addressing IR35 risk

Though it is ultimately the hiring firm that decides the IR35 compliance processes to be applied, they may be open to recommendations. The hirer will generally have no prior experience of IR35 and will be relying heavily on the agency to help complete any negotiations. Though they wouldn’t be considered IR35 experts by any means, most recruiters will have handled requests from contractors to make IR35-friendly alterations to arrangements in the past, and so will have some degree of understanding.

All parties stand the best chance of securing a legitimately ‘outside IR35’ arrangement where there is cooperation and clarity throughout the supply chain, and where hirer, agency and contractor are all involved.

Protect yourself with insurance

Though the hirer is responsible for determining the contractor’s IR35 status, agencies face the primary tax liability risk in the event that HMRC challenges an assessment – that is unless the hiring firm has failed to take ‘reasonable care’ when conducting the status assessment. In the public sector, fears over tax liability risk left many agencies reluctant to engage contractors outside of IR35.

However, this is an unhelpful approach which benefits no one. In any case, agencies needn’t be concerned provided they have assisted in ensuring that the necessary measures have been taken to accurately assess IR35. Agencies can gain another layer of protection by securing tax investigation insurance, which provides the expertise and costs necessary to mount a strong defence in the event of an HMRC investigation.

Agencies suffer disproportionately from the Off-Payroll legislation and the issue of administrative costs is probably the most difficult to tackle fairly, which makes it all the more important that agencies play their part in negotiating legitimate outside IR35 arrangements.

Renegotiate margins to accommodate employment taxes

Finally, agencies will also have to consider the cost of employment taxes on fees paid to ‘inside IR35’ contractors and work out with the hiring firm how these are going to be accommodated. This is another liability which really shouldn’t rest with the agency. Being the party that deemed the contractor ‘employed for tax purposes’, the hirer is for all intents and purposes the ‘deemed employer’.

Nonetheless, the legislation dictates that the agency is ultimately liable. As a reminder, employment taxes consist of employer’s NICs (13.8%) and the Apprenticeship Levy (0.5%). This sum is due on top of the contract fee. This is a rather unreasonable cost for a recruitment agency to pay and will therefore need to be sourced elsewhere.

With the rate the agency charges being fixed, one option is to reduce the pay rate being quoted to the contractor. Hirers will need to understand that paying by offering a lower pay rate than before, they are unlikely to be able to attract the same calibre of worker.

The alternative is to increase the rate charged to the hirer so that they at least contribute towards this cost. This could prove awkward, and you will no doubt encounter hiring firms that are reluctant to pay more for what they see as the same resource.

Ultimately, hirers that wish to hire contractors and treat them like employees will need to accept the accompanying additional cost burden.

Preparing for the reform – contractors

Although contractors have few statutory responsibilities when it comes to the Off-Payroll legislation, choosing to take preparatory steps will impact on whether you can continue operating on an outside IR35 basis beyond April 2021. There is no tax risk for the contractor under the new rules, provided they haven’t committed fraudulent activity, but to secure an outside IR35 engagement you must play an active role in the compliance process.

The immediate threat that the Off-Payroll legislation imposes on hirers and agencies is the chance of being investigated by HMRC, and possible tax liability risk. As the public sector reforms have shown, this can prove very effective in seeing parties taking non-compliant, evasive action by conducting and facilitating blanket status assessments, so all contractors are deemed ‘inside IR35’ by default.

As a contractor, it’s your job to help prevent this, and there are plenty of reasons for the hirer and agency to fulfil their compliance requirements. The first of which is the faact that taking ‘reasonable care’ is the necessary requirement for hiring firms to rid themselves of any tax risk. In an Off-Payroll context, this essentially means taking care to ensure that you have arrived at a correct status determination. Contractors need to make everyone realise that. The message is clear – start talking to hirers now.