IR35 – Will we see a repeat of last year?
With the IR35 changes only a couple of months away it seems an appropriate time to review the current preparedness of businesses, the different approaches being taken and consider whether this is any different to what we saw last year.
As we are all aware the IR35 changes represent a significant change for businesses that use contract resource. Whilst many view this as a business risk, implementing a response which is compliant with the legislation is likely to present business with an opportunity; that is the opportunity to attract and retain the best flexible resources in the market which will be particularly important as the trend to use flexible resource is growing as we move through the Covid-19 pandemic and recession.
Let’s start with a review of how much time businesses have given themselves to prepare. One of the advantages of the delay in the roll-out of the legislation is that it was intended to give businesses an extra 12 months to prepare. Last year, we saw many clients leave this to the last minute with most not commencing their projects until January or February 2020 and some side-stepping the rules by imposing blanket bans on contractors. It looks as though we will see the same approach this time around.
This is not however all due to client inertia, we have seen the impacts of the Covid-19 pandemic continue to impact many businesses throughout 2020 and into 2021. Unfortunately, they have not been able to prioritise their IR35 response and many are likely to leave it to the last minute again. Some of these businesses are probably hoping that HMRC will delay the rollout for another 12 months, however, this is highly unlikely to happen as HMRC are strongly advising that businesses work towards an April 2021 rollout.
It should be noted that businesses that reacted early last year have, in the main, continued running with their IR35 project throughout 2020 and are now focussing on BAU beyond April 2021 and how to accommodate flexible working into their broader workforce strategies, these proactive businesses are in a good place to capitalise on the changes.
In the run-up to the April 2020 changes, we spoke to many businesses who were attempting to manage the changes using the HMRC Check Employment Status for Tax (CEST) tool with internal staff answering the questions and issuing the determinations.
Interestingly, this time around there are far fewer businesses planning on taking this approach and are instead bringing in suitably qualified external advisors to help them with the employment status assessment process. I think this is due to several factors:
- Businesses that used CEST last year experienced significant contractor challenges and did not have the resources or knowledge to deal with them, this had a bad impacted on relationships with contractors and the supply chain.
- Businesses that used CEST (or other commercially available automated decision-making tools) did not benefit from the wrap-around services that come with a specialist IR35 consultancy firm and whilst they were able to generate status determinations with minimal effort, they did not understand why the outcome was as it was, which meant they were unable to explain it or improve the position.
- HMRC have now produced very clear guidance which states that if you use CEST incorrectly you will be subject to fines and penalties. There are hundreds of pages of guidance on the HMRC website around the use of CEST and HMRC will expect every business that has used it to have read and understood this and answered the questions in line with this guidance and the case law.
- HMRC guidance is now very clear that if a business has engaged a suitably qualified specialist to assist with their assessment process (and they have followed their advice) then the business has done what it is required to do (has met reasonable care) and will not suffer any penalties or fines. This is resulting in more businesses seeking external advice.
Support for businesses
We now have far more information available in the form of HMRC guidance than we had last year. Whilst this is a positive step it does mean that those businesses who are managing the changes with internal resource will have been expected to have read, understood and implemented the HMRC guidance. Failure to do so will result in them not taking reasonable care and therefore being exposed to fines and penalties.
There are also now far more “IR35 experts” in the market offering their services to support businesses. Whilst this presents a choice to businesses, it does create some confusion and risk. As noted above, choosing the correct partner to support you with the IR35 changes can help ensure you meet your reasonable care requirement and are protected from any tax risk. Be wary of the credentials of providers purporting to be IR35 specialists. If you are considering external support ensure you do your due diligence on the provider; how long have they been advising on IR35, what qualifications do they hold, do they have client testimonials, is IR35 advice their core business or is it being used to supplement other revenue streams?
In summary, I don’t think the 12 months delay has resulted in businesses being any more prepared for the IR35 changes than we saw this time last year. There is however far more guidance available from HMRC and far more support services available in the market. Businesses that have yet to act should quickly consider whether they want to go it alone or select a partner to work with and commence the project ASAP. HMRC have indicated another “soft landing” so whilst the clock is ticking it is not yet too late to manage this change adequately.
If you are unsure where to start and want to ensure your business is prepared, contact Brookson Legal today.