IR35 legislation, a UK tax law that affects independent contractors, coming into the private sector is generally considered a matter of when, not if. The legislation has incurred significant negative press and has caused much public confusion since its introduction into the public sector last year. Despite that, HMRC shows no sign of faltering on its implementation in the private sector also.
HMRC estimates the cost of non-compliance will reach £1.2 billion by 2022-23. This is huge sum HMRC will certainly want to pursue.
The thing is, the tightening up of legislation is not specific to the UK. It is global. In the US and Europe, the liability of contractor misclassification often sits with the end client. While the UK is in a very uncertain time with the forthcoming Brexit and is heading into a time where an agile workforce will be even more vital in enabling businesses to navigate these changes, we still believe it is likely that the IR35 changes will be brought into the private sector in 2019.
How will your business prepare? We offer five tangible ways to get ready:
1. Conduct an Internal Audit. Carrying out an initial audit will allow you to delve into your current guidelines, policies and procedures on how you engage your independent contractors and identify any potential areas of risk well in advance of the legislation changing.
Auditing your current independent contractor population will allow you to understand the roles they are delivering, the areas/projects within the business that they are working on and the highest departmental users within this list. Depending on the maturity of your contingent workforce program, this itself can often be an interesting exercise.
2. Create New Guidelines for Engaging Independent Contractors. The audit will allow you to start considering how to develop the guidelines, write policy changes and update any procedures based on the forthcoming.
Your business may already have some basic outlines on who can and cannot be engaged as Limited Companies.
Your CWP Programme Manager or designated person will have to liaise with numerous stakeholders in your business, from Legal to Tax to HR and the Hiring Managers themselves, to help develop and refine and enforce the policies that go into these guidelines.
3. Make Sure Independent Contractors are Properly Classified. Most of the comments on HMRC’s CEST tool suggest that it is not fit for purpose (a statement that HMRC disputes vigorously). Some recent court cases that have not gone their way and have contributed to more confusion and substantial bad press for them at what would be considered a “bad time” for negative PR.
Further adding to businesses confusion is that the more traditional IR35 assessments being offered usually only consist of a contract assessment, which in my opinion is insufficient and far from best practice. As supported in recent employment-related court cases is that if the courts feel that the operational activities of the day to day workings don’t match the contract, the former will take precedence.
4. Have a Written Contract for All Independent Contractors. Having said all of that, a well-constructed contract is vital in engaging any independent contractor, as it outlines your working relationship and is the key element in the performance of best practice.
5. Form a Team to Handle Issues. Depending on the maturity of your CWP, constructing a cross-functional programme team will be vital in assessing and managing the forthcoming IR35 changes and risks. Generally, we see our clients include team members from the likes of HR, legal, compliance, tax and procurement as well as members of their MSP provider to give a wide breadth of knowledge and input.
Engaging independent contractors can be a confusing business. The more traditional compliance strategy of passing the liability down the supply chain is unlikely to stand up in the new world and, with the uncertainty around IR35, it will be even trickier for businesses to navigate.