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A practical guide to planning for IR35 reforms
11 October 19 | By: Jas Jhooty
Sweeping changes in the way that medium to large Private Sector businesses are to engage with off-payroll workers were announced in Budget 2018. From April 2020, these firms will have the onerous responsibility of taking reasonable care in ascertaining the employment status for any Personal Service Companies (PSC) they have engaged with. If the engagement is found to be that of deemed employment (i.e. the individual would have been classified as an employee if it wasn’t for the veil of incorporation) then the Private Sector business will be mandated to deduct payroll taxes from the net amount of any invoices presented to them by the PSC.
This legislative change requires substantial planning by affected Private Sector businesses. This article offers practical advice and best-practice solutions on how to manage Private Sector IR35 reform.
Setting up an IR35 reform project team
If you haven’t already done so, now would be a good time to set up an IR35 reform project team. Representatives from your HR, Finance, Payroll and Legal departments should be invited to be members of this team. Amongst the first items that should be discussed is the issue of how you will be able to identify any PSCs that you have on your supplier list, as this is not always obvious.
The best practice methodology would be to assign a task within the Finance Department to work through due diligence supplier check list to identify any PSCs. emTax consultants have devised such a checklist that incorporates 4 key employment status questions. If the assessor can answer at least two of these questions positively, (by doing a little bit of online research), then you will be safe to classify that supplier as not being a PSC so will not be affected by the IR35 reforms. A copy of the completed checklist should be retained in the supplier file to prove to HMRC that you have taken reasonable care in identifying any PSCs that you may have engaged with.
Contact us if you want more details about our IR35 due diligence supplier checklist.
Status Determination Statement methodology
The next stage is to select a robust system for performing the required Status Determination Statements. Lessons should be learned to avoid what happened within the Public Sector when IR35 reforms were introduced in April 2017. Most Public Sector Bodies were instructed to use HMRC’s flawed Check of Employer Status Tool (CEST) to assess common contractor roles under blanket IR35 determinations. Unsurprisingly this methodology resulted in nearly all contractors supplying services into the Public Sector being caught within IR35, thus requiring PAYE tax & Class 1 NIC to be deducted from their presented invoices.
We advocate that the Private Sector should avoid making blanket determinations as they are invariably inaccurate and will either lead to too many contractors being labelled as employees thus affecting your bottom line. Conversely if you decide that whole groups of contractors fall outside IR35, you run the risk of miscategorisation for certain individuals within that group and thus will be liable for backdated tax & Class 1 NIC.
You need to choose a system that takes no shortcuts when considering which employment status factors require consideration. HMRC’s CEST tool misses out at least 2 key employment status factors and only asks a maximum of 16 questions. To make an accurate employment status determination, adequate information on every employment status indicator needs to be gathered. Questions need to be asked of not just what the contractual position is, but also what occurs in reality. We estimate that at least 50 questions need to be asked to arrive at a reliable employment status determination.
The only safe way is to choose a system that will automatically make accurate and reliable determinations using advanced algorithms. Behind the scenes these algorithms should apply an individual weighting to every answer provided and then balance which side of the employment status scales, your contractors’ status fall into.
Evidence of this process in the form of the required Status Determination Statement should go into the specific detail of which answers have been provided and what the relevance of those answers are to the overall employment status determination.
Our consultants have reviewed the available automated Status Determination Statement software available on the market. Our recommendations can be found here.
Changing your contracts and working conditions
Employment tax advice should be sought in how you should change your contracts and working conditions to ensure that as many contractors as possible can remain outside the new IR35 provisions. This is an important factor that needs to be considered when you are choosing your Status Determination Statement methodology.
Unfortunately, the requirements for IR35 assessments will not be a one-off. Whatever system you use will need to baked into new workflow procedures to assess any new contractors’ employment status, post April 2020. There will also be occasions when an existing contractor’s employment status will need to be revisited because their circumstances may have changed; e.g. an initial 3 month contract has turned into a 9 month engagement.
Our consultants have made a recording of a webinar presented to the CIPP in October 2019 with up to date advice on how to prepare for IR35 reform. You can register to view this free webinar by clicking on this link.