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Private Sector IR35 Reform: Help Your Clients Maintain "Reasonable Care"
Submitted by James Holt on Thu, 25/07/2019 - 16:30
The draft legislation on Private-Sector IR35 reform has now been published, and while many are disappointed at the news that there will be no delay and no U-turn, it does at least bring an end to some of the uncertainty and allow everyone to get on with the urgent preparations that need to be made.
How to Help your Clients Prepare for IR35 Reform: click here to download our free guide>>
For a number of reasons, most often resourcing issues or time constraints, we're still seeing recruiters and their clients talking about "blanket" or "role based" determinations. There are a number of reasons why this is a terrible idea for your clients, and as their trusted expert there are two ways that you can help them avoid disaster:
Help them understand that individual IR35 assessments are the only viable way forward
Introduce them to compliance experts who can help them implement the necessary processes
Are blanket IR35 assessments such a bad idea?
Where resources and time are in short supply, and they usually are, blanket or "role based" IR35 decisions might look like a viable solution; decide what the IR35 status is likely to be based on the role, and send all contractors doing that role down that path. What could possibly go wrong?
From a recruiter's point of view, we think it is useful to assess the role, but only as a way to manage contractor expectations. Each contractor still needs an individual IR35 assessment for each contract. Here's why:
Blanket IR35 decisions do not constitute "reasonable care"
The legislation states that a status determination is not valid unless "the client has taken reasonable care in coming to the conclusion mentioned in it". Where this requirement is breached, the tax risk passes to the end client.
Where all relevant information has not been considered, for example where the contractor's individual circumstances did not feature in the process, it will be difficult to argue that reasonable care has been taken, so it's very much in the client's interests to complete individual assessments.
Insurance underwriters will not cover the tax risk
Unless an individual assessment has been made, the risk will be difficult or impossible to insure. We expect that most recruiters will be unwilling to take on an uninsured risk, and your advice to your clients should reflect this.
The Window for HMRC Investigations could be extended
If investigated by HMRC, "carelessness" in making the determination could result in the enquiry window being extended to six years, or twenty years if the error was found to be deliberate. There is no real difference between "carelessness" and "a lack of reasonable care". Once again, completing an IR35 determination without considering the contractor's individual position will constitute a lack of reasonable care.
Blanket "inside IR35" decisions make it more difficult and expensive to hire contractors
From what we saw in the Public Sector, where blanket decisions are used, they're most likely to be pushing all contractors inside IR35, because this is perceived as the "least risky" option. This means that those contractors who would have been outside IR35 are treated as if they were inside.
Where contractors are treated as inside IR35, there are two negative effects from the client/recruiter's point of view:
The contractor takes home less money, because they have to pay PAYE tax and NICs, and are more difficult to recruit and retain as a result.
The contractor costs more, because employer's NICs are due. This cost must either be covered by the fee payer (usually the recruiter), or passed on to the client.
Where the contractor should be outside IR35, a blanket inside decision means these effects are felt unnecessarily. It's far more cost effective to complete individual assessments and allow contractors to operate outside IR35 where appropriate.
What is the best strategy?
As we've said already, it's much better to complete individual IR35 assessments for each contractor, and each new contract and blanket determinations are just not a safe solution. We understand that this is a daunting prospect for many clients, in terms of the expertise required as well as the time it could take and the potential disruption to the supply chain. That's why it's important to engage with compliance experts like Orange Genie Compliance, who can help them implement the necessary processes and avoid such delays and disruption.
However, if we're asking what the best strategy is, we should probably take it a bit further.
The ideal situation is where all or most of the contractors you engage can be correctly assessed as operating outside IR35. This contains the risk, because they've all been correctly assessed, it contains the cost, and it protects the contractor's income, making them easier to recruit and retain.
While this isn't always under your client's control, they can create an environment that makes it more likely. Orange Genie Compliance can assess their situation and their risks, and help them to create an "IR35 friendly" environment.
If you have any questions or if we can help in any way, please contact our expert team on 01296 468 483 or email info@orangegenie.com.
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