Months to go
It’s been more than two years since former chancellor, Philip Hammond, announced reforms to IR35 would be coming into force in the private sector. The reforms are being made to IR35 to level the playing field between employees and contractors who broadly do the same roles at a business but don’t necessarily make the same national insurance and income tax contributions – because of their differing employment statuses.
The government is also making these changes to IR35 to bring the private sector in line with the public sector where £550 million was raised in income tax and national insurance in the first year since its inception (it was introduced in the public sector in 2017).
For industries like professional services, hospitality and construction, that rely heavily on contractors, the legislation is going to have a significant impact and with under three months to go, the time is now for finance teams to act – if they haven’t already done so.
According to recent research around two in three businesses aren’t prepared for the reforms - this isn’t surprising - with Covid-19, Brexit and managing the recovery and bottom line implications of these, finance professionals have had a lot on their plate.
IR35 will have been the least of your worries, so you won’t be alone if you need to refresh your memory of the complexities of the reforms to IR35 and what you need to do.
Recapping what we know
As providers of services, contractors are responsible for their own tax payments, sick pay, holiday pay, pensions and more. They may work in the office with the rest of the team, have a desk at the organisation, be invited along to social events, but they are not classed as employees. This is where the government is determined to root out the ‘disguised workers’ – yet the lines are extremely blurred.
This is demonstrated by quantity surveyor Mark Daniels’ IR35 tax appeal win against HMRC in 2019. The court found that he was ‘not’ treated as an employee by Structure Tone Ltd, after he claimed that ‘despite being expected to work in shift patterns set by STL, this did not constitute control, as all construction sites are run in this way’. The case revealed the real complexity of defining who is and who isn’t a disguised worker.
In the governments’ eyes, some contractors are using their position to pay less income tax, as they can pay a lower rate of tax through their company. The government wants to clamp down on those who are for all intents and purposes, an employee. Unlike the public sector, in the private sector it will be up to you as a business to determine and demonstrate IR35 status of your contractors. If you can’t, you could be hit with a significant fine.
So before the legislation comes in, it’s important that the finance and HR departments of businesses who rely on contractors, put policies in place that ensure they know the IR35 status of each one.
The departments have to work together, otherwise it could mean contractor fees, salaries or other key quantitative metrics are worked out inaccurately across the business, which could lead to wasted time at best and fines for non-compliance at worst.
Invest in a contractor management system
One of the best ways to ensure your contractors are correctly inside or outside IR35 status, is to have a system in place that offers full visibility of employee data with functions such as ‘off payroll’ that allows you to accurately assess what your employees’ national insurance contributions might look like.
Access Contractor Management helps you to do this as well as manage all your responsibilities for IR35. It has the functionality to help you maintain visibility over your contractors statuses, pay the correct tax and keep a history of all contractor transactions. It allows you to easily manage invoices as well as forecast accurate payment calculations and make timely full payment submissions (FPS).
Investing in contractor management tools as part of a data-backed finance software package isn’t just a short-sighted investment only applicable for IR35. Over the coming years, HMRC is going to insist that corporation tax returns are submitted via accounting software that integrates with the government’s APIs, as tax across the board moves digital. The digitisation of accounting practices will mean financial management systems are going to become ever more important.
If you don’t feel ready for IR35, now is the time to act.
For more details on Access Contractor Management, you can check out our IR35 factsheet