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Key steps for HR as dust settles post off-payroll

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We learned from the Department for Transport’s (DfT) latest annual accounts that Network Rail is hiring 79% of contractors on an outside IR35 basis.

That is good news for Network Rail and the contractors they hire as just two years ago, Network Rail decided to blanket ban all limited company contractors.   

We also hope that this is a good sign for the contingent labour market and firms that benefit from the flexibility of the contracting workforce.


Tips on IR35:

How HR can make the most of the new IR35 rules

Knowing your supply chain post IR35 reform

IR35 regs highlight need to clarify employment status


Since April we have seen some firms cope better than others.

Some heeded the industry’s advice and adopted a compliant hiring strategy that worked to help them assess their contracting workforce and continue to hire contractors on a basis consistent with their status either 'inside’ or ‘outside IR35’.

Other firms, for many reasons, pressed the reset button on their existing workforce rather than assessing them, and introduced a blanket ban on limited company contractors.

The downside for many was that their valuable contracting talent upped and left and projects suffered.

Some companies turned to HMRC’s much maligned Check Employment Status Tool (CEST) to assess workers.

Since its introduction in 2017, CEST has caused many problems for the contractors and hirers who have used it and even government departments have fallen foul of it with the Department of Work & Pensions, HM Courts & Tribunal Service and the Home Office recently facing over £100 million in tax bills. 

CEST is not the law and it can expose those who use it rather than provide them with the protection they need.

Key considerations post-IR35 include the following.

 

Reasonable care

The legislation states that if reasonable care is not taken when considering the conclusion in a status determination statement (SDS) then the client – the firm at the top of the chain – will be the fee-payer, and liable for any unpaid taxes.

This provision is different to the carelessness provisions, which form part of the Taxes Management Act 1970 (TMA), which can determine whether further penalties are due, and it is a high bar – because HMRC needs to prove reasonable care has not been taken.

It’s highly unlikely, if you have exercised reasonable care to have got the determination wrong.

It will also be very hard for HMRC to convince a tax tribunal as such when all parties are claiming otherwise.

A robust compliance process will provide assurance.

 

Consultancy

One area causing medium and large firms difficulty is where they engage with consultancies to deliver services on a purported contracted out basis.

In this case, the consultancy would be the client for off-payroll purposes.

However, if this position is successfully challenged by HMRC, where the 'consultancy' is not providing service but is providing labour, the hiring firm becomes exposed because they become the client under off-payroll.

Because the hiring firm did not issue any status determination statements they become liable for any additional taxes, not the consultancy.

There is no reasonable care provision in the legislation around making decisions about contracted-out services, so procurement teams should put processes in place to ensure that they are protected.

 

Is the tax being paid?

Some firms conduct initial role-based assessments, not full assessments, and conclude that the role is inside IR35. They then inform their recruitment agencies to hire as on-payroll because the role is likely to be inside IR35, however they don’t provide a final SDS to the agency or contractor.

Firms need to be careful to secure their supply chains, because the legislation does not bind the recruitment agency or subsequent fee-payer inserted into the supply chain (e.g. umbrella) to follow the client’s opinion.

If the firm has communicated inside IR35 to the agency and/or contractor, but not provided an SDS, then the firm is still the fee-payer, by law.

In this instance, the agency or umbrella could override the client opinion and pay the contractor’s limited company gross, while not carrying any tax risk themselves.

 

Changes to status

Some firms may have discovered during the implementation of off-payroll that they had some contractors who had been working with them for years.

Good contractor management means checking contractors to make sure they are doing what they originally signed up to, not deviating from their status determinations and not hanging around for years as they become part of the corporate furniture.

It is also vital to monitor contractors, in real-time, to gather evidence.

 

Collate evidence

The new off-payroll legislation includes section 61M(4), which mirrors section 49(4) from the original Intermediaries Legislation. It means all the circumstances need to be considered when assessing status, which includes the conduct of the contract.

A first-tier tax tribunal is a fact-finding tribunal which means it will rule based on the facts.

And it’s these facts, gathered during the contract, corroborated by all parties at the time events took place, which can be crucial to building a defence.

So, the message is clear: firms should secure their supply chains for on-payroll contractors and make sure they monitor the off-payroll ones and gather evidence.  

That way, firms can reduce their risk while meeting the reasonable care bar.

 

Dave Chaplin is CEO of IR35 compliance solution IR35 Shield and author of IR35 & Off-Payroll Explained