Last week, Brooksons managing director, Matt Fryer, sat down with HR magazine to discuss the IR35 repeal and its implications for HR managers. You can read the full article here, or keep reading for the key takeaways below:
Lizz Truss sent shockwaves through the U.K. when she and Kwasi Kwarteng proposed a complete repeal of the changes from April 2023, a policy almost as short-lived as Truss’s premiership.
The change in IR35 has evoked strong and emotional responses. For HR professionals currently responsible for IR35, the mini-budget announcement brought relief, ending the need to determine and manage the employment status of all contractors. Reverting the IR35 responsibility to the contractor would have helped alleviate the administrative burden while removing the financial risk of tax liabilities from inaccurate determinations and the reputational risk of non-compliance.
The latest u-turn returns responsibility for making accurate status determination statements (SDSs) with the end-hirer. Meaning, that the hiring business is responsible for ensuring correct tax and national insurance (NI) contributions are paid and that the organisation is liable for any unpaid tax liabilities if found non-compliant.
The current IR35 legislation is not working
The initial repeal of the changes was the Government admitting that the legislation is not working as expected.
As set out in the Government’s Growth Plan 2022, the repeal aimed to “free up time and money for businesses that engage contractors, that could be put towards other priorities” and also “minimises the risk that genuinely self-employed workers are impacted by the underlying off-payroll rules”.
The issues with IR35
It is evident that the Government views the current rules as too time-consuming and resource-heavy for businesses, and that contractors may be receiving unfair status determinations.
The challenges with the current IR35 legislation need to be addressed, the flexible supply chain is also facing broader compliance issues that need to be rectified to support the growth of a contractor workforce.
There are multiple routes to determine the tax status of contractors, including online tools such as CEST but as ever, a tool is only as helpful as the person using it. Added to this is the complexity of the legislation which means approximately 20% of contractors are unable to be classified by CEST and need to be audited by a specialist.
Don’t waste your time using CEST to determine the classification of your contractors, only a specialist can ensure your business is compliant. At Brookson, we have a dedicated team of knowledgeable and experienced lawyers who are experts in IR35 and help hirers of flexible workers comply with the law.
How do you de-risk the broader supply chain
The current IR35 rules also place responsibility on businesses at the top of the flexible supply chain to ensure that all parties are following the rules. For example, if an SDS is completed further down the supply chain, it is important to make sure it is accurate. As if found to be wrong, HMRC could look further up the supply chain to recoup the unpaid tax and NI.
This is particularly important for those with long supply chains with outsourced service provision. These complex talent networks can hide risk especially when a statement of works (SOW) is used as an IR35 get-out-clause.
Falling foul of this most recently was HS2, which is anticipating a £9.5 million IR35-related tax bill, as the agreement between HS2 and its consultancy did not reflect a genuine managed service.
This effectively moved the responsibility for IR35 determinations and in turn, tax liability, up the supply chain – in this case to HS2.
To de-risk the supply chain, organisations need to look beyond the SDS and gain visibility of their partners’ (agencies, umbrella companies, payroll providers) compliance. Supply chain due diligence is essential to assuring labour supply chains and ensuring compliance with the Criminal Finances Act. Failure to do so can lead to significant legal, financial and reputational risks to the business.
At Brookson we provide IR35 audits to help our clients identify any risks within their supply chain. You can contact us here if you’re interested in this service.
The Government is expected to save £1 billion to £2 billion by keeping the existing legislation in place and the IMF strongly indicates that the Treasury must rebalance the books through taxation, we expect HMRC will be proactively seeking to recoup tax liabilities in the years to come.
IR35 is a complex legislation and navigating it, and the wider supply chain compliance requires specialist knowledge, insight and ongoing support. For this reason, it’s vital that organisations seek a compliant IR35 solution now to ensure that they mitigate risks throughout their supply chain and be confident that further down the line they will be compliant should HMRC begin an investigation.
Our unique combination of experience, expertise and credibility means that we are the obvious choice for hirers who want to assess their existing flexible workforce. We offer a range of services to ensure our clients are 100% confident in their employee compliance.