Do private sector businesses understand IR35?
With IR35 now well over 6 months old, you would assume that businesses have implemented the correct processes and procedures, allowing them to remain compliant in the eyes of HMRC. With the IR35 ‘soft launch’ coming to an end in April 2022 and HMRC preparing to enforce these changes, we wanted to learn how clued-up businesses are on the IR35 legislation change and if they are aware of how IR35 has been handled by the private sector as a whole.
To get a better understanding of how knowledgeable people really are when it comes to IR35, we launched a quiz in September letting participants test their knowledge of IR35. So, what did we learn?
Let’s start with question one: What should the percentage of outside to inside roles be? With all job roles from April 2021 requiring an IR35 status, it’s surprising to see that only 56% of participants knew the correct answer here. During the run up to the changes, HMRC’s view was that most businesses would see a 70%/ 30% split of outside to inside roles. Even though over half surveyed got this correct, it’s still a concern that some people are unsure what good should look like when auditing their workers. Not having a correct understanding of this means businesses might be settling for outcomes that might make attracting talent difficult.
With 15% of roles being advertised as outside of IR35 we were shocked to see a staggering 63% of people we surveyed assuming the rate is much higher. Overall, this shows there is still a lot of work to be done by private sector businesses in order to achieve the 70/30 split.
Moving onto Question, If the person completing the audit via CEST/ online tool doesn’t understand what they are doing, does this demonstrate reasonable care? A high volume of respondents here have chosen to use an online tool, such as CEST, to carry out their IR35 reviews. These tools are quick solutions for determining a worker’s IR35 status but depending on the knowledge of the person completing this review, it may not necessarily meet the reasonable care obligation required by HMRC. In recent months we have seen a number of public sector businesses incur fines from HMRC for incorrect IR35 determinations. In all of these situations, CEST was used. In our survey, we asked participants what do online tools fail to take into consideration when carrying out an IR35 review? Shockingly, 47% of participants got this wrong and didn’t realise that an online tool doesn’t demonstrate reasonable care. This is concerning as it means that a large number of businesses may not be aware that they are not meeting their reasonable care obligation, making them liable for any fines and penalties in the future.
When using an online tool, such as CEST, businesses need to remember it is an automated process meaning it can result in an undetermined status due to the complexity of IR35. Question 5 of our quiz, How does an online tool help you resolve an undetermined status? This resulted in 50% getting this correct answer, it doesn’t. Businesses need to be aware that if using CEST an undetermined status will require them to seek external support in order to deliver an inside or outside status on the role they are auditing. It’s really important to remember that an undetermined status isn’t an IR35 status that can be applied to a role.
Many people we quizzed were unaware of how high the undetermined status percentage is, on average 20% of audits completed via CEST result in an undetermined status, but only 15% of the participants we quizzed answered correctly. If businesses are finding undetermined results in their audits, we would recommend working with a specialist IR35 partner to ensure an inside or outside status can be provided. Some businesses looking for a quick fix to IR35 may think it’s easier to put any role with an undetermined status as inside IR35. This shouldn’t be the approach, if the business provides the wrong IR35 status and can’t demonstrate that they have taken reasonable care, they could be at risk of fines and penalties.
We talk a lot about businesses being fined for not complying with IR35 and receive a lot of questions regarding HMRC investigations, and if they really happen. One of the most recent investigations leading to a fine has been for the Department of Work and Pensions, who incorrectly audited their workers using the CEST tool. In our quiz, we asked participants: If they knew how much the Department of Work and Pensions were fined for not complying. Only 18% of participants got this correct by answering £88 million. Yes, that is correct. 88 million is an extraordinary amount of money and businesses need to be thinking can they afford a fine like this?
Fines do happen and over the past few month’s we’ve seen HMRC winning a lot more of these IR35 tribunals. Another example of a recent HMRC fine is the Home Office, which received a £33.5 million fine for also not complying with the IR35 legislation.
HMRC are taking the legislation change seriously and with the soft launch coming to an end in April 2022 it reiterates how important it is for businesses to ensure they have the right processes and procedures in place to ensure their supply chain can remain compliant.
If you have read this blog and have further questions, or think you need additional support with IR35 Brookson can help! Get in touch with Brookson Legal to speak to an IR35 specialist who will work with you to ensure you are compliant.
*Survey based on statistics provided in August 2021 from JobFeed Data