News

IR35 In A Nutshell

As Chief Financial Officer of Leading Resolutions Sheila Bryant examines the complexity of the tax regime from sitting in the unique position between the Finance and Resourcing teams with years of experience running and outsourcing associate workforce's.
August 14 2019

So, the off-payroll working rules (IR35) will hit the private sector in April 2020 pushing all the risk and all the admin burden of managing contractor tax affairs on to businesses.  

But surely HMRC have provided guidelines and tools to help us mere mortals apply the rules correctly” I hear you cry! 

Short answer – no.

So, what does this mean for business leaders and how can it be addressed? 

Lower Skills Mobility

We are all dependent on right skills, right place. Digital skills are in short supply and as the new legislation hits many experts believe we will see a move away from contracting toward permanent employment. Most contractors won’t want to pay tax as an employee without having any employment rights or security. Why bother? More permanents, slower recruitment processes, longer notice periods. Stalling programmes unable to recruit fast flexible resource from the contract market.

More Compliance

For each contractor who is deemed inside of scope you’ll need to run payroll and process their invoice, deducting tax from the payment to the personal service company. That accelerates cashflow and puts the admin on the hirer. Not only that, get it wrong and it’s you the hirer that has to pay fines, interest and more tax – probably long after the contractor has left so without the ability to recover the extra tax from the worker.

More Risk

Yep. You have to get it right. Actually, for the contractor there’s less risk as someone else makes the tax decision that he or she used to make. But businesses now must decide if the contract is IR35 or not. And that’s each contract – no blanket determinations allowed. Get it wrong and, again, fines and taxes are down to you, the hirer. It pretty much doubles the cost – a contractor that you thought cost you £10k per month will actually cost you more like £18k if HMRC decide the contract was IR35 when you had determined it not to be.

Less Certainty

I guess we could all live with the new rules if it was clear how to apply them, but it’s not. The HMRC CEST Tool (Check Employment Status for Tax) is nothing short of dreadful; out of date and cumbersome. Even if you use it the answer isn’t binding on HMRC as they reserve the right to disagree with the result. Add to that uncertainty in the courts (just look at recent cases such as the Talksport presenter Paul Hawksbee and note that panels of experts simply can’t agree) and we’ve got a real mess to deal with.

Businesses simply don’t have the bandwidth to cope with these additional stresses, right in the middle of Brexit too (I got this far without mentioning the B word!) so what are people doing? 

We are seeing this manifest in two ways:
Simply getting ready to cope with the new legslation

Simply getting ready to cope with the new legslation

Getting new processes in place today, talking to contract workers to ensure that they are aware. Identifying dependencies on individual contractors and aiming to reduce them, or if that’s not possible, then securing additional budget to offset tax and keep the individual in post.  

People are looking at buying skills rather than buying resources

People are looking at buying skills rather than buying resources

In fixed fee, outcomes-based statements of work businesses can push both risk of compliance and risk of delivery on to their chosen partner. And this can be a really cost-effective way of ensuring project delivery. Moving from full time contractors to buying in the right skills at the right time, aligned to the delivery roadmap, benefiting from market expertise of the chosen consultancy raises the bar. 

Note from the Author - Sheila Bryant

Let me know your thoughts about IR35 and by all means get in touch with me on LinkedIn / email with your comments and any questions. I’d love to hear how you are responding and of course answer any questions you may have.

Sheila Bryant LinkedIn

For more information on how we are helping our clients with smarter delivery of key business programmes see our IR35 Assessment Tool and Digital Skills as a Service.