With the final chapter of 2020 complete, recruiters, end hirers and contractors are ready for a more prosperous year. There are many difficulties we have overcome, but there is one last hurdle we have to metaphorically jump over as an industry, and that is upcoming reform to IR35.
The UK Government has confirmed that there will be no further delays to the private sector off-payroll working reforms due on 6th April 2021, meaning that those working with or within the contracting industry will have to prepare (if not done so already) and tackle the reforms head-on.
One solution widely reported on is the use of ‘blanket determinations’ on off-payroll working. This is whereby the end hirers opt to determine all their contractors to be working inside IR35. This means that those contractors pay the same taxes as an employee.
This approach has a number of implications for businesses and contractors alike and may leave many independent professionals being forced on payroll when - if the contract had been assessed using reasonable care - they would have been found outside IR35.
What are the reforms to IR35?
Following on from the public sector reforms to off-payroll working in 2017 comes Chapter 10 Part 2 ITEPA 2003, which will apply to both the public and private sector. In a nutshell, these reforms mean that from April 2021, where the end hirer is a public sector organisation or a medium or large company in the private sector, the responsibility of determining the IR35 status of an assignment and issuing a Status Determination Statement (SDS), now lie with the end-hirer and not the contractor.
This is significant as the accountability - and crucially the liability - of unpaid taxes is now with the end hirer and not the contractor. This has spooked many end hirers because if they have thousands of contractors being taxed as outside of IR35 when they should be inside, this could lead to a large and unexpected bill from HMRC. This is one reason why we have seen some knee-jerk reactions with the introduction of blanket determinations.
Keep in mind - These reforms don’t change the rules around what constitutes as inside or outside IR35, just who is responsible for determination.
Cautiousness may lead to higher tax costs
We all want to err on the side of caution, especially when securing the long-term viability of our businesses. This is one of the major reasons why some end hirers are going for a blanket approach. The theory is that by playing it safe and having all your contractors on payroll, you won’t be hit by an unexpected tax bill.
The issue is, if you are incorrectly assuming your contractors fall within IR35 when they are actually outside, then you will be hit with a higher tax bill straight away through employer’s National Insurance. This is especially important in the current economic climate. Paying higher tax by way of National Insurance contributions (when it may not be necessary) can lead to higher costs and leave your business with fewer resources to regroup in 2021.
You can assess the financial impact of your IR35 strategy using our Business Impact Tool.
Will you attract the top talent?
Blanket determinations could alienate your current and future contractors. A recent survey by HMRC found that two-thirds of contractors are accurately determined to be working outside of IR35. This is significant as by refusing to engage with PSC contractors you are essentially removing a vital pool of talent.
This matters because post-April, end-hirers are more likely to attract top contracting talent if they do their full due diligence when completing Status Determinations Statements (SDS). An accurate and compliant outside of IR35 SDS will mean the contractor will maintain the same take home pay and are therefore more likely to choose that end hirer, over one that goes ahead with blanket determinations.
Are you a recruitment agency? Take a look at our IR35 compliance checklist for recruiters.
As Clarke Bowles - Head of Key Accounts at Parasol - explained in our Parasol X Qdos Vodcast:
“Because of other factors affecting their (end hirers) business. COVID, working from home, etc. They may have taken the approach for a quick, what they perceive to be, compliant approach to blanket assess. Will that minimise their (end hirer or agencies) risk? Yes, but then that comes with its own set of problems. Are you a commercial business that can attract the top talent?
“These reforms can 100% be managed. Not just managed, there’s a huge opportunity here. You can drive compliance throughout your supply chain, you don’t have to increase your rates to keep contractors and you’re more likely to reduce the cost of employer’s National Insurance.”
Some might believe that the upcoming IR35 reforms cause more problems than it solves. That may be correct, but it also gives forward-thinking end hirers and recruiters an opportunity to stand out from the crowd. By offering a bespoke service to your contractors, you are helping to ensure you are a commercially viable option to your contractors, whilst keeping your costs low. As Nicole Slowey from Qdos Contractor explained in our Vodcast: “IR35 is not a one size fits all. There are so many different considerations that each organisation has to take into account.”
With you all the way
Here at Parasol, we have teamed up with Qdos Contractor to help determine the IR35 status of both our clients and their clients. This approach gives you unrivalled expertise in compliantly determining the IR35 status of your contractors. Just request a callback and a member of the team will be in touch.