Common IR35 mistakes and how HR teams can avoid them
The rule changes around IR35 come into force on 6th April 2021, so it’s essential that businesses understand the requirements and avoid potentially costly pitfalls.
The postponed changes to IR35 legislation are fast approaching, with responsibility to manage and assess a contractor’s employment status for tax purposes moving from the individual contractor to the hiring organisation. This change will be taking place on the 6 April 2021, and will affect all medium and large-sized businesses.
It is important to consider how to obtain visibility of, and how to manage compliance within, your supply chains.
HMRC recently released a paper outlining the support it will be giving to organisations to manage this process. Accepting that mistakes will be made, the paper promises a soft-landing approach to businesses that are making an effort to be compliant with the change in legislation. In the first 12 months, companies won’t be levied a penalty as a result of making genuine mistakes, but HMRC will still expect the correct tax amount to be paid (or refunded) – so even genuine accidents could be costly.
Mistakes to avoid outlined within the paper include:
- Making inaccurate Status Determination Statements (SDS) using automated tools or by assigning responsibility to the wrong person.
- Failing to ensure that correct information is given to the relevant parties in the supply chain and to ensure it is passed on in time before payments are made.
- Failing to ensure your supply chain ensures that correct taxes are paid for inside IR35 roles.
It is important to note that should a company be found to be deliberately non-compliant with IR35, then HMRC will still be enforcing penalties. Thankfully, there is still time to get this right.
Making accurate Status Determination Statements
There are a number of pitfalls to avoid when it comes to making accurate Status Determination Statements. With the potential for tax to be recovered later in the year, this is a costly mistake to make regardless of financial penalties.
While there are tools out there such as CEST and others that can help determine statuses of contractors, the tool will only be as good as the person using it. HMRC will stand by the results of these tools, but state that information inputted into them has to be correct in order to provide the best accuracy.
A tool will not always be the best port of call for organisations to use, as the user may not be fully competent with using the tool. This could lead to the inputting of incorrect details, which could result in non-compliant status determinations, tax liabilities and ultimately fines from HMRC. Furthermore, roughly 20% of the contractor workforce is unable to be fully classified by CEST and other online tools, meaning that for total compliance, these contractors will need to be audited by a specialist.
Asking contractors (or agencies) to submit their own status determination statements might seem to be a good idea, since they have previously held this responsibility, but it is the hiring business that will now be ultimately responsible for tax liability in the event of an incorrect decision. To demonstrate the ‘reasonable care’ stipulated by the legislation, we would urge private sector organisations to take the time to create their own status determinations for all in scope workers.
Failure to ensure that the correct information is given to the relevant parties in the supply chain before payments are made
It is crucial that the SDS you have produced finds its way to the right party in the supply chain at the right time. Failure of a supplier or you to meet your obligations of providing the SDS can result in liabilities sitting with different parties in the supply chain, some of whom may not be aware and therefore failing to pay. This liability can ultimately find its way back to the end hirer and a simple administrative error can result in significant unexpected tax bills arising.
Failing to ensure that the correct taxes are paid for inside IR35 roles within your supply chain
It is important to ensure visibility of IR35 compliance throughout the contractor supply chain in respect of payments made to contractors.
Making a ‘blanket ban’ on working with contractors through personal service companies is often seen as an easy route to compliance, but there is a risk that this approach may just push the risk further down the supply chain through the use of non-compliant umbrella companies. While the involvement of compliant umbrella companies in your supply chain can be a good solution to manage the responsibility for contractors’ payroll and tax, any mistakes made could still become the liability of the end-hirer. The sector is currently unregulated, with many tax avoidance schemes for contractors posing as legitimate umbrella companies. We would advise businesses to choose their partners carefully and look for FCSA accreditation.
Another outsourcing mistake is to simply label contractors’ work as ‘contracted out service’ or a ‘Statement of Work’ (SoW). This could backfire, however, if not implemented correctly and does not work for certain types of engagement. It is essential that businesses take the time to analyse the services being provided by all of their suppliers to ensure they have accurately determined who are in scope and who aren’t.
As well as ensuring that an accurate SDS is produced, it is important to consider how to obtain visibility of, and how to manage compliance within, your supply chains. Sound management of the new IR35 obligations extends beyond the initial production of the SDS and businesses should consider how they can obtain visibility of their supply chains to enable them to adequately monitor and enforce compliance.
Interested in this topic? Read Is current employment law fit for purpose in the new working world?