Since March, when lockdown began, business-as-usual has almost disappeared in many organisations. However, some topics that we were expecting to address have not gone for good, just for now. One of them is IR35.
We published technical guidance on IR35 in February of this year, when many private-sector organisations were preparing for a 6 April 2020 compliance date. The Chancellor then announced a one-year delay as part of the response to COVID-19.
6 April 2021 will come quicker than you think, so the second half of this year is an opportunity to consider how your organisation will implement or improve its implementation of IR35.
But do you even need to worry about this? If your organisation falls under the small companies regime (Companies Act 2006), then no – it applies only to medium and large companies. If your organisation must comply, the first question internal audit should ask is ‘How well do we understand, let alone interpret, this law?’
IR35 aims to discourage "the hiring of individuals through their own service companies so that they can exploit the fiscal advantages offered by a corporate structure"(HMRC 1999). What this means is that when organisations hire workers through an intermediary, they need to be clear how they will work. This is the case whether the hiring takes place via the worker’s own limited company, a partnership, an agency, or an individual.
If contractors are genuinely working as self-employed people – deciding how, when and where they complete the tasks, with no obligation on either side to offer or accept future work – then the hiring organisation is compliant.
The problem arises when organisations hire workers as contractors and then treat them as employees, but without paying any of the benefits or taxes associated with employment. If the contractor is a sole trader, they will pay their own national insurance (NI) contributions when it should be the employer or agency doing so. If the contractor is a limited company, they could be paying far less tax than they should.
A contract for the purpose of the off-payroll working rules is a written, verbal or implied agreement between parties.
The off-payroll working rules apply on a contract-by-contract basis. A worker may have some contracts which fall within the off-payroll working rules and some which do not.
Currently, in the public sector, the hiring organisation is responsible for determining a worker’s status and is therefore liable if non-compliant. In the private sector, workers can determine their own status for each contract using HMRC’s Check Employment Status Tool (CEST). The private sector includes third sector organisations, such as some charities.
However, in preparation for IR35 compliance, many organisations already insist on determining workers’ status. Some are not doing it correctly, by banning all use of contractors, for example, which is highly risky. In forcing people who had worked independently to become employees or leave, an organisation faces the real risk of losing highly skilled, knowledgeable, and experienced staff. Sectors such as oil, finance and IT are obvious areas where a blanket approach could backfire.
Others insist that sole traders who want to work with them do so only as limited companies (ignoring the fact that IR35 arose from misuse of limited companies, not sole traders). Yet others demand contractors work through umbrella companies. Again, many contractors with a choice may simply walk away – leaving the organisation with important key-person gaps and risks.
The workers potentially affected by IR35 are not only highly-skilled, highly-paid specialists. The coronavirus crisis has demonstrated the extent to which UK now depends on self-employed and agency workers – many of whom are on low-paid or zero-hours contracts – to deliver essential goods and services.
Any organisation thinking that a ‘blanket’ approach is the safest way to demonstrate compliance is mistaken. We all know from our internal audit work that a blanket approach rarely succeeds without causing the likelihood of other risks to increase.
Wherever possible, organisations that are not yet required to comply with IR35 should let contractors determine their own status. Organisations that must determine workers’ status are required by law do so with ‘reasonable care’. This means understanding who is working as a contractor and assessing how and where they conduct their work. Some may be limited companies provided highly technical crisis consultancy through workshops. Others may be delivery drivers or cleaners hired through agencies. Using the same approach for all these people is clearly inappropriate.
Internal audit in organisations that will have to comply next year should use the next nine months wisely.
Come 6 April 2021, HMRC is likely to be less forgiving of any lapses in compliance, including ‘blanket’ approaches. We have an extra year – let’s make it work for all workers and our organisations.
CIPD – Employment status Q & A's
ICAEW – IR35 articles
The following guidance is only available if you are a member of the Chartered IIA: