Do you engage contractors in the security, international development or extractives industries in the UK or send them abroad? Does your company have a connection to the UK? Are you a contractor based in the UK? Then our 4-week blog series is a must-read around this rapidly approaching enforcement of the legislation that will impact you and your business.
Our 4-week blog series will cover:
1. What is IR35 and its Impacts?
2. How to mitigate IR35?
3. How to assess roles for IR35?
4. What are my IR35 Options?
This week, in “How to Mitigate IR35” we will cover the IR35 risks highlighted in last week’s blog for End Clients and Contractors, and we will detail how to mitigate those risks.
You must take, and be able to prove, “reasonable care” in your determination process. We will detail out how to do this in next week’s blog, “How to assess roles for IR35”
From an End Client Perspective:
There are four main risk areas:
• Reputational Damage (from failure to comply)
HMRC are widely expected to go after a major brandS in an IR35 compliance crack down. This has been evidenced already in August 2019 when they accused 1500 contractors at GSK of being, “disguised employees”. No one wants to be in the headlines for failure to comply or to be in dispute with the British tax man, as it will have multiple knock on effects such as ability to win new business. This is heightened by the COVID-19 pandemic, as HMRC will be looking to claw back every penny spent in areas such as the Job Retention Scheme.
• Financial Impacts from Non-Compliance. Higher Wages and Fines
If it is determined that your contractors are, “disguised employees” which maybe the case given the unique circumstances of the security industry, then the engagement may well require a, “temporary employment” contract. This will result in higher wages through having to incur Employers costs, such as NIC’s. AWR may also apply. We will highlight options available to you in our 4th blog, “What are my IR35 options”, on the 28th September 2020.
In terms of penalties, where a determination has been found to be wrong (i.e. determined outside, when should have been inside), HMRC will require the unpaid PAYE tax and National Insurance Contribution liabilities, including any late payment fines and interest to be paid by the End Hirer. Additionally, HMRC has the discretion to issue a penalty ranging from 0-100% of the initial outstanding liability. The biggest known penalty to date was issued in October 2019, to NHS Digital, for £4.3m. IR35 compliance must be taken seriously!
• Operational Impacts. The need to ensure service continuity
The key to mitigating IR35, is to prove, “reasonable care”, as mentioned above, in determining your contractor population.
You must quickly complete a review of your working practices and processes, particularly around, “Control” to ensure early compliance, and to further evidence, “reasonable care” in case of an HMRC investigation. You must assess each, “role” (not an individual) as to whether IR35 applies, and this includes the incumbent contractor population. You need to consider the 4 key tests of IR35:
• Mutuality of Obligation
• Substitution
• Control
• Part and Parcel
In addition, you must consider other factors, such as tenure, which we cover in next week’s blog on, “How to assess roles for IR35”. Ideally, no one should be a contractor in the same role for longer than 24 months.
HMRC has stated that it will have a 12-month grace period concerning IR35, but this is in relation to penalties – it will still investigate. It is not clear if that grace period, however, will still stand given the 1-year delay to IR35 due to the COVID-19 pandemic. Just don’t waste time, comply early!
• Uncertainty. The unknown for your Contractor population
It is imperative to use the time now to communicate with your contractors on IR35 and the likely outcomes of any IR35 approaches you put in place. Creating a clear communication strategy and building IR35 awareness now will reduce the uncertainty for both yourselves and the contractor base, whilst also helping them with wider IR35 awareness. It will further boost any “reasonable care” arguments in the event of an HMRC investigation.
If you find that your contractors are deemed “inside” of IR35, you may be forced to look at the “temporary employment contract” mentioned above. If so, AWR will become a factor, and you will need to create pay bands for role comparisons between permanent and temporary roles.
We will explore further options available to you in our 4th blog, “What are my IR35 options”, on 28th September 2020.
From a contractor perspective:
• Loss of earnings for being, “deemed inside”
Under the IR35 legislation, it will be the responsibility of the End Client to determine if your role is inside of IR35 or not. If inside, you will have to pay NIC and Tax as an employee. This will have an impact to your income.
There are options to mitigate the risk here, such as becoming an umbrella contractor, or simply becoming an employee of your own company, but both will result in an impact to your earnings.
What is imperative, is compliance with the legislation. HMRC want the increased tax revenues, estimated at £3bn, especially in light of COVID-19, and will not continue to have the Private Sector operate differently from the Public Sector. HMRC are starting to win cases in the courts for back taxes, as highlighted recently, for £140k.
We will highlight what options you have in our 4th blog, “What are my Options” on XXX date. IR35 insurance packages are available, with the options to have legal fees covered as well, from providers such as Kingsbridge and QDOS.
• Potential for HMRC to investigate for back taxes
As per last week’s blog (need link here to blog 1), HMRC reserve the right, even though they state the legislation is forward looking, to investigate for back taxes, up to 6 years in arrears, where fraud may have occurred. Don’t give them any reason to investigate! Make sure your company is set up correctly, and you have supporting evidence, such as a website, company email addresses, business cards etc.
• non-uk registered, overseas end client
There are legitimate concerns as to whether IR35 applies when you are engaged abroad, for a non-UK registered, overseas end client. The widely held consensus here is that if you are registered in the UK for tax purposes, irrespective of where the work takes place, or where the end client is registered, you must ask the end client for an IR35 determination, and if determined as “inside of IR35”, the end client must withhold the necessary PAYE taxes.
Where can I find out more?
Feel free to enter questions in the comments section below and look out for our third blog on 21st September 2020 on, “How to assess roles for IR35”. We will also be holding a Q&A session on the 6th of October 2020.
Additionally, contact us at Proelium Law on [email protected], or visit our website at https://proeliumlaw.com/.
About HiverPath
HiverPath is a boutique consultancy focused on the Staffing Industry. With over 20 years’ experience in the industry, covering the UK, Europe and Global markets, HiverPath can assist in multiple areas:
- Regulatory Compliance
- Workforce Strategy and Planning
- Technology
- Implementation and Project Management
- Change Management
- Market Analysis
- Cost Efficiencies and Business Analysis
- Diversity and Inclusion
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