The end of HMRC’s soft-landing period for the “off-payroll working rules,” also known as IR35, is nearly with us. In April, HMRC will move to enforcement of the new legislation. What does this mean for businesses and what do they need to consider? When might HMRC begin issuing tax bills and fines?
According to evidence presented to the House of Lords Finance Bill Sub-Committee, many businesses have invested considerable time and resource into implementing IR35 correctly. For those businesses, the end of HMRC’s soft-landing period will not be a significant cause for concern, but an opportunity to reflect and review their current IR35 solution. However, for others, it is a trigger point that will help ensure a robust and compliant IR35 approach is in place.
Some organizations are feeling a false sense of security, according to recent Brookson research of 500 business leaders responsible for IR35. Our Reassessing IR35: The unspoken opportunity for growth report found that while 87.6% of midsize to large companies believe they understand the “reasonable care” requirements set out by HMRC and are confident they’re compliant, many have relied upon questionable IR35 solutions.
For example, 47% of businesses relied upon HMRC’s Check Employment Status Tool for contractor status determinations, while 42% relied upon other automated online tools. However, online automated tools such as CEST have been found responsible for recent public sector fines – clearly demonstrating they are not fail-safe; as with any automated tool, they are only as useful as the level of skills and knowledge of the person using it.
A third of businesses also asked agencies (31%) or contractors (35%) to make IR35 status determinations. This is against the instruction of the new off-payroll working rules; we strongly recommend seeking a robust solution that can meet the needs of the organization as soon as possible.
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Reviewing IR35 Solutions
Positively, when asked in the fourth quarter of 2021, 25% of midsize to large businesses now responsible for the IR35 compliance of their contractors had already reviewed their solution, 31% planned to do so before January 2022, and a further 27% planned a review before April 2022. This clearly demonstrates the diligent approach the majority of organizations are taking to ensure compliance.
The end of the soft-landing also coincides with plans by 90% of companies to extend their use of contractors over the next 12 months to support business growth. This will see IR35 solutions increasingly replied upon, and where solutions are robust and compliant, could provide businesses with a competitive edge and the ability to offer roles outside of IR35 where appropriate.
However, 17% of businesses will not be reviewing their solution before April, 4% of which do not have an IR35 solution in place. This is concerning, particularly when considering the broader approaches that some businesses have taken to IR35. While 71% determined IR35 tax status of contractors via individual assessment on a contractor-by-contractor basis, 41% are also using more manageable role-based assessments and 25% have applied a blanket decision across their whole workforce or subsets of the workforce. By using a blanket approach to IR35 determinations, end hirers risk being left behind as competition for talented contractors continues to increase.
Beyond the initial solution put in place for managing IR35, ongoing status determination checks will be necessary, which forms a key part of the end-hirer’s reasonable care responsibility.Data surrounding how often businesses plan to review the status determinations of their contractors was positive – companies plan to review contractor status’ each month (22%) or every three months (39%), while only 30% plan to review every six months and 8% once a year. Ongoing reviews of status determinations is a distinct feature of reasonable care, so it’s important that all hirers regularly review contractor determinations in case of role changes.
April marks a clear milestone in the private sector’s IR35 journey and provides an opportunity for all organizations to review the IR35 solution they have in place. This period of reflection will also enable end hirers to iron out any teething issues with their IR35 approach and be sure that it will provide an effective framework for accessing the benefits of the flexible workforce and importantly, will meet the needs of a growing and agile business.