Most businesses ill-prepared to handle IR35 tax changes

Nearly half (45%) of UK businesses have yet to make any preparations for IR35 – one of the largest reforms to contractor tax law in history. From April next year, it will be businesses responsible for assessing a contractor’s employment tax status – not the contractor themselves, and it’s an issue that will land in the lap of many financial directors.

Even when businesses are aware of the upcoming changes, many are not taking their responsibility seriously but are instead considering taking a blanket approach to all contractors because they don’t have the time to assess them individually.

This is deeply worrying when you consider that so many businesses are reliant on freelancers and contractors, and it suggests that lessons have not been learnt from when these changes were rolled out in the public sector.

The findings, published in our recent report IR35: A Ticking Timebomb reflect what we hear anecdotally – even though there is less than a year until the new off-payroll IR35 working rules come into force many businesses are leaving it too late to get ready.

When asked why they are not taking action, 45% of businesses are delaying because they are awaiting further guidance from HMRC, 32 per cent are waiting until nearer the time and 24 per cent are waiting on advice from their recruitment agency/partner.

Complexity and confusion

A significant cohort (16%) do not know what steps to take. This is perhaps not surprising considering the complexity of the legislation. When politicians debated the issue in Parliament in April, MP Ged Killen, stated “one of the major issues with the IR35 changes is the great difficulty in assessing whether an individual should be caught by the rules.

Her Majesty’s Revenue and Customs’ *(HMRC) guidance and tools are far from 100 per cent effective, and there is a lot of complex case law.” Another MP, Susan Elan Jones, said “the thing that really strikes me is how complicated it is.”

It can be difficult to understand who is affected by the changes and employers are understandably concerned about assessing contractors incorrectly. When we asked businesses about their fears, 33 per cent said they were worried about losing skilled contractors. A further 32 per cent said they   were concerned about wrongly placing workers inside/outside the IR35 rules.

These are all legitimate concerns but, nevertheless, companies are expected to get their heads around the changes and be ready by next April.

What exactly are the changes?

IR35 isn’t particularly new – it was introduced in 2000 to ensure that self-employed contractors pay the correct income tax and national insurance. The recent change is that from April 2017, within the public sector, the obligation to determine tax status and the associated tax risk moved from the worker to the hirer.

With this change applying to medium and large-sized businesses in the private sector from next spring, hirers will be required to take “reasonable care” when assessing roles.

In March, the government launched ‘Off-payroll working rules from April 2020’, a policy paper and consultation looking at how the reform to the off-payroll working rules should be implemented within the private sector.

It outlines areas such as how organisations should make status determinations, ensure reasonable care and what happens if a contractor disagrees with the decision. It will soon be publishing more details in its draft Finance Bill on July 11, which will be formalised this autumn.

What should firms be doing now?

Irrespective of the finer details of the law being finalised, businesses should already be forming a cross-functional team (across HR, finance, and procurement) to spearhead the project and get ahead of the reforms.

The first priority is to conduct an audit of your contractor workforce. For many, an audit will bring a sigh of relief with limited IR35 exposure, while others may find the employment status of some of their contractors much harder to determine.

This is where seeking out strong legal advice from IR35 specialists may help lift the burden of responsibility and provide peace of mind in terms of making correct assessments.

Interestingly, in our recent report, 77 per cent of businesses are concerned that all or some of their contractors will be inside IR35, so this reveals the potential impact the changes could have.

There is also the potential of reputational damage if found non-compliant and the risk of contractors jumping ship to competitors if they do not believe you are taking IR35 seriously. Contractors are looking for much-needed reassurance – in fact, 78 per cent of businesses report they are already being asked questions about IR35 by their contractor workforce.

Whether the private sector likes it or not, the new IR35 off-payroll rules are coming into force in less than a year. However, by undertaking proper audits and seeking expert advice, businesses will be able to illustrate that they are taking ‘reasonable care’ with their IR35 assessments and will almost certainly find that the impact of IR35 is not as far-reaching as they first feared.

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