Private Sector IR35 Reform April 2020 – Planning for Employers

In April 2020 there will be changes coming into effect in the contractor market regarding IR35 – is your organisation ready? and is the flexible workforce fully prepared? Given the dates of April 2020 for the IR35 changes, the need is immediate for contracts spanning beyond this date according to Anthony Sherick, MD of Technojobs.

The new rules mean that changes to IR35 legislation which were introduced in the public sector in April 2017, will now be extended to medium and large private sector companies. This is applicable to companies with a turnover above £10.2m, or above £5.1m on its balance sheet; or has more than 50 employees. You can read detailed content on IR35 Private Sector Reforms on ContractorUK.com.

From next year, businesses engaging contractors via limited companies will become responsible for setting the tax status of these individuals. As part of this reform, the tax liability will also transfer from the contractor to the fee-paying party in the supply chain, which is typically the recruitment agency or the company that directly engages the individual. Thus the employer will set the status of the contractor and the agency may be liable if retrospectively assessed differently.

The legislation is complex with consequences if HMRC does not agree with your contractor assessments. The employer must decide whether, if the contractor did not exist and taking all intervening parties out of the equation, the individual providing the actual work would be an employee of the client. This is not at all straightforward and can involve complex ‘employment status’ considerations, many of which clients may not be that familiar with including supervision, direction, control and Mutuality of Obligation.

A recent survey of over 31,500 respondents has shown that a worrying proportion of private-sector employers are not aware of the looming IR35 changes. The data, compiled by Hays, revealed that less than half (43%) of medium and large-sized private sector organisations who regularly engage non-permanent contractors have begun preparing for the changes coming into force in April 2020.

Meanwhile, a survey by the Association of Professional Staffing Companies (APSCo) cited around half of businesses are still unprepared for changes to off-payroll working in the private sector.

Over two thirds (68%) of medium and large-sized organisations in the private sector believe the biggest risks of IR35 to be potential cost increases, followed by over half (56%) who are concerned about a loss of key talent. Nearly half (46%) of private-sector employers believe the changes to the legalisation will make it harder to engage non-permanent contractors.

In summary, the rules are the same but the burden of decision making and tax liability if incorrect is shifting away from the contractor. Theoretically, nothing should change.  However many employers are making blanket decisions regarding their future assessments of contractors.  The primary reason for making the decision that IR35 rules apply is the avoidance of any tax risk and to ensure a very straightforward policy that will not involve any compliance assessments. This could be harmful to the contractor market as it is not fairly assessing individual contracts that may well be outside of the scope of IR35. You can see examples of IR35 company assessments here.

Against making these blanket assessments is that business-critical contractors may refuse to take the work on inside IR35 roles or via umbrella companies. Essentially this will reduce the take-home pay of contractors and thus there could be a loss of contractor talent. Whether that talent switches to permanent employment or only chooses roles that are outside of IR35 remains to be seen. Or alternatively accepts working via an umbrella company but maybe at a higher rate.

The objective of HMRC is to raise income, however, legitimate contractor Limited Companies are being targeted via blanket assessments. Time will tell if this will create resource issues on critical projects as was witnessed when the rules were introduced in the public sector.  All the major parties promised to review the legislation at the General Election in 2019 even at this late stage.

By undertaking individual and bespoke risk assessments, employers will be able to comfortably offer outside IR35 roles which are common now – and thus be able to attract the best contractor talent to their organisations especially niche skills in demand.

Advice for employers engaging with contractors:

  1. Research & identify your current contractor workforce
  2. Engage with your complete supply chain including agencies
  3. Work out risks and potentially higher costs of working beyond April 2020 with contractors
  4. Make a decision on hiring contractors – via Limited Companies, Umbrella’s or PAYE. Mitigate this against the business requirements
  5. Don’t blanket decision by default without consideration
  6. Communication plan to business, agencies, contractors
  7. Create new recruitment processes and supply processes to accommodate the above
  8. Consider the opportunity for permanent offers and attracting contractors to perm roles

Employers must prepare its contractors and get to grips with assessment. How they engage with contractors may impact their attraction of contractors to their business, which will make it harder to deliver company projects.

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