The IR35 countdown is on: top 5 IR35 myths debunked
IR35 continues to dominate the headlines as medium and large private sector companies work to get their contractor populations and working practices in order ahead of the 6th April deadline.
The upcoming reforms will create a seismic shift in the way we attract and retain talent in the UK, whilst delivering widespread changes to business operations and supply chain relationships.
Despite the constant chatter, confusion is rife over the looming IR35 reforms, with our recent blog revealing how more than half (54%) of the 1,000 contractors surveyed said that they were still unaware of the upcoming changes to off-payroll working.
To separate fact from fiction, here we debunk the five most commonly cited IR35 myths.
We are responsible as the clients’ agency for determining the IR35 status of their contractor workforce
Currently, contractors engaged via a PSC (Personal Service Company) and operating in the private sector can determine their IR35 status, but from April 2020 this responsibility shifts to the end client. There’s a misconception amongst some businesses that the labour provider, such as Morson International, is accountable for determining the IR35 status of their clients’ workforce, yet it’s down to the end client to conduct these reviews and ultimately make these decisions as to whether individuals fall inside or outside.
IR35 legislation isn’t one-size-fits-all, meaning private sector businesses must demonstrate ‘reasonable care’ throughout this process. Following the lessons learnt from the public sector roll-out – which saw many organisations adopt a cautious approach and deem entire contractor populations as inside of IR35 – HMRC has insisted that every private sector company produces a status determination summary (SDS) that outlines the reasons to deem that individual as inside or outside.
Anyone found not to have adopted reasonable care risks the IR35 determination becoming worthless, meaning those found to be ‘blanketing’ could be increasing their chances of a penalty from HMRC.
These same organisations also risk losing talent to their competitors who may have deployed the necessary and accurate steps towards IR35 determination and deemed these same contractors to fall outside of the legislation.
We are responsible for communicating IR35 decisions with individual contractors and managing the appeals process
As with determining IR35 status, it is also the responsibility of the end client to communicate these decisions to every party throughout the contractual chain, together with managing the appeals process.
Legally, every contractor has the right to appeal the decision of the end client, to which the client then has 45 days to respond. Excellent communication between all parties within the contractual chain is paramount, ensuring those involved can openly express their views without fear of prejudice.
Adopting the same reasonable care as described above, will able end clients to address any disagreements and evidence the reasons behind their employment status decisions.
Yet some sectors, such as construction, lack full transparency over their supply base, which poses the risk of being caught out when required to supply the SDS document to every party within this chain.
And whilst the end client has the ultimate decision, the power remains in contractors’ hands. From April 2020, contractors need only compare two clients and choose the working relationship that will do its best to ensure they operate outside of IR35. Meanwhile, those willing to move to PAYE or Umbrella may also demand increased pay rates and additional benefits to compensate against any financial losses.
The changes won’t be implemented into the private sector come April 2020 and a delay will shortly be announced
The uncertainty caused by the Brexit narrative, the deadlock in Westminster, the decision to review IR35 legislation and the Budget delays has caused further confusion, with some clients and contractors perceiving this to be a delay to the reforms.
This is most certainly not the case, with the new tax regime needing to remain top of the private sector agenda. Our recent blog here details the IR35 review and the Treasury is still very much pressing ahead with its original April deadline.
The countdown to comply is therefore on, with private sector organisations having just weeks left to get their houses in order and deliver risk-averse talent strategies that ultimately protect their operations and finances.
HMRC’s CEST tool is the best option to correctly determine IR35 status
The risks posed by HMRC’s Check Employment Status for Tax tool (CEST) have been widely highlighted, with numerous public sector companies even receiving fines from the Treasury as a result of incorrect determinations that were delivered by CEST.
To ensure our private sector clients, and other private sector businesses, don’t fall foul of the same pitfalls, we have developed our independent review process. Created in conjunction with our IR35 expert partners, the process ensures each organisation takes the necessary steps to accurately test whether those individuals engaged through PSCs fall inside or outside.
The flaws surrounding CEST are often rooted in the tool’s simplicity. It fails to align with full case law, with ‘Mutuality of Obligation’ – a key determiner of IR35 status – not even being considered.
Despite HMRC promising to roll out an updated version, the criticism surrounding its use remains rife, with many stating how the questions fail to address or understand the nuances that are present in client and worker relationships.
I can simply create ‘IR35 friendly contracts’ to give outside determinations
A common industry misconception is that having an ‘IR35 friendly contract’ that details a specific set of terms and conditions will ensure you fall outside of scope. Yet IR35 status is determined by your working conditions rather than the written contract. Those relationships that don’t reflect the contractual clauses risk their determinations being dismissed by HMRC.
A shift in the responsibility from contractor to end client will work to eradicate this myth, with end clients able to answer questions specific to their organisation’s ways of working; in what should then deliver a correct IR35 determination.
Whatever your sector, it’s crucial that you seek support and guidance from a team of compliance experts to provide a holistic approach to IR35 and demonstrate reasonable care throughout the employment status review process.
For more information and to find out how the Morson Group can support you, contact our IR35 compliance experts today at IR35@morson.com or visit our IR35 portal.