IR35: The Story So Far
The basis of IR35 is to ensure that the tax paid by everyone is fair and comparable regardless of the way in which they work. It was initially introduced in 2000 and in 2017 had legislation changes relating to the responsibility of assessing determinations and the liability of an employer making an incorrect determination.
With this in mind – we could be forgiven for wondering what all the fuss is about. IR35 is established and is already working and applicable to a large proportion of the UK workforce, so it should be easy to roll out further changes to the private sector?
The answer isn’t straight forward. On the one hand, undoubtedly many public sector organisations that were required to comply with similar legislation changes applicable to them in 2017 made blanket decisions about the status of their contractors and we saw many contractors or freelancers move from PSC to Umbrella, CIS or PAYE arrangements. However, not everyone agreed with these decisions and we have subsequently witnessed a number of high-profile legal cases taken against organisations, such as the NHS and the BBC for example, that have resulted in these blanket decisions being called in to question.
Fast forward a few years, and to avoid a repetition of some of the issues experienced in the public sector and to address concerns raised by businesses, HMRC has made it clear that blanket assessments do not show reasonable care. It has firmly placed the responsibility of assessing whether individuals providing a service to a company should be deemed to be working ‘inside’ or outside’ of IR35 with the employer. It is recommended that the status determination statements (SDS) should be carried out on a case by case basis.
This makes sense on paper, however, a very large majority of the contract/freelance workforce are supplied, and thus employed by, an intermediary agency. This would mean the SDS would be made by the end hiring company, but the tax and penalty liability, should this determination be deemed incorrect, would lie with the intermediary (fee payer), which would be the agency. To overcome this imbalance, HMRC has, over the course of the last few months, shifted the focus onto the process of making correct determinations in the first place.
Why is “Reasonable Care” Important and How is it Defined?
The end-hirer will be called to demonstrate that they have exercised “reasonable care” when making a determination on a contractor’s status. Demonstrating “reasonable care” is important not only because it reduces the risk of financial penalties and increased tax liabilities, but it also protects the integrity of the talent supply chain. If each and every component of the chain fulfils their obligations in ensuring they meet all aspects of IR35 requirements, there should be no unexpected consequences, financial or otherwise. There are wider implications beyond tax as well. If companies are not seen to be applying “reasonable care” they run the risk of assuming full liability of unpaid taxes, fines and legal costs. This in itself will be the main motivation for compliance, however, it is also worth noting that the knock on effect is wider reaching such as not being able to attract or retain the talent who rely upon and expect accurate assessments to allow them to deliver their service.
The definition of “reasonable care” has evolved as the business community continues to scrutinise the upcoming legislation changes and push for clarification. HMRC issued guidance in
February 2018, detailing that employers should be “doing everything you can to make sure the documents you send to HMRC are accurate“ and going on to say that it will take individual circumstances into consideration when assessing whether “reasonable care” was taken. This year, after facing criticism for not clearly defining what constitutes “reasonable care”, HMRC
issued a draft document in its Employment Status Manuel addressing the issue. In it, it says the larger and more resourced the organisation, with dedicated HR teams and in-house counsel for example, the higher the expectation that accurate determinations will be made and in turn, the higher the penalty for non-compliance.
What Should Companies Be Doing Now to Ensure They Show “Reasonable Care”?
As a result of the stumbling blocks experienced legislation changes applicable to the public sector in 2017, it is clear that blanket assessments are not an acceptable response and are likely to
result in a multitude of non-compliance issues. HMRC has recently confirmed that if an organisation makes a blanket assessment, they may be liable for statutory costs involved in employing contractors even if these costs have already been paid by the intermediary. It is recommended that going forward all assessments should be made case by case with expert input where possible to mitigate risk and protect everyone in the supply chain.
Many SDSs were made in preparation for the original rollout of legislation changes scheduled for April 2020. HMRC have now said that those will stand as long as they are checked to ensure they remain valid. If any changes are identified, then a new SDS must be issued.
There are a number of options open to companies that want to demonstrate that they are taking “reasonable care”; some more robust than others. HMRC launched their own assessment tool (CEST) but its accuracy has been called in to question and HMRC themselves have not always stood by a SDS made as a result of using the tool. Larger organisations with dedicated IR35 compliance experts in-house can choose to carry out assessments internally, but for the majority of businesses the most sensible option is to enlist the help of an external resource to make determinations. In fact, HMRC specify that enlisting external assessors is a clear indication that “reasonable care” has been taken.
Working with an expert recruitment agency, umbrella company or legal firm with a track record in working within the IR35 framework is the best place to start. Working with your supply chain to put effective processes in place ensuring determinations can be made prior to April 2021 is absolutely key.
Carrington West have almost a decade of experience working with clients and contractors ensuring adherence to IR35 legislation and are able to guide all businesses, however large, in creating effective and compliant processes.
If you would like to discuss how we can help of would like further information please contact James Fernandes on 02393 876 005.