IR35 for employers: what you need to know
This article aims to demystify the changes to IR35 for employers and how it will affect businesses. We have also included our own insightful observations that will help organisations navigate IR35, avoid unnecessary costs and make the correct determination of IR35 status for contract and interim engagements.
For large and medium-sized businesses, failing to determine the correct status of your interim or contractor can not only mean considerable taxation or fines, but can also incur additional costs to access in-demand talent.
What is IR35?
IR35 is a piece of legislation from HMRC that defines the off-payroll working rules for businesses, contractors, and their agents. The legislation was first introduced in 2000 and aims to regulate the tax and national insurance contributions of interim management and independent contractors who are operating through their own limited company.
What are the changes to IR35 2021?
As of April 2021, there will be further amendments to IR35 that mean all medium and large-scale businesses will be responsible for deciding if their interim or contractor engagements are IR35-compliant. Interims and contractors will still be responsible for their own IR35 compliancy if they are providing services to a small-scale business. These changes have been brought in because HMRC found many contractors were doing the same or similar roles to permanent employees, but were able to avoid comparable levels of taxation and National Insurance contributions by operating as a limited company.
IR35 Test: how to determine if your interim manager falls outside of IR35
IR35 is aiming to crack down on ‘employees in disguise’, contracted staff who, for all intents and purposes, provide similar work to permanent staff but aren’t required to pay PAYE or NI taxes. While the majority of the mandates coordinated through Oakwood Resources would be deemed ‘outside IR35’, it is important for businesses to be able to evidence this. There are several factors that HMRC would look at to determine IR35 compliancy, the ‘IR35 test’:
- Supervision and control
Interims should work autonomously without management or supervision. They are brought in at a high level to provide industry expertise and as such should be able to function independently. A business should not necessarily stipulate an interim’s working hours, and they should not have access to benefits entitled to permanent staff, like holiday or sick pay.
An interim manager should be able to be substitutable with another interim with similar skills and experience. This ensures that an interim is not being engaged for their individual personality as you might with an employee. Interim placement should be based on skillset and/or end solutions alone.
Providing your interim with your business’ equipment can be considered grounds for treating them like employees. Interims should use their own mobiles, laptops and software to manage their projects.
Although using an interim can create a very positive relationship between the end-user business and the interim, especially if they performed well on the project and yielded good results, organisations should not feel obligated to provide them with another project or contract.
Equally, interims should complete their projects on time and within budget and not feel obligated to extend or start a new project with that client and should look for their next assignment elsewhere. If an interim’s skillset is useful on another project within the same business, a secondary contract would need to be drawn up just as if it was a different interim.
Inside IR35 expenses and impacts on businesses
Many organisations have chosen a risk-averse approach and have determined that all contract engagements fall within IR35, therefore requiring all contractors to incur higher rates of taxation and thus reducing their overall take home pay. It is therefore not as simple for businesses to simply make blanket determination for contractors to fall inside IR35 as many specialist interims -- who remain in high demand -- will still have options and will look for contracts with higher day rates. IR35 expenses for businesses therefore may increase to account for the otherwise shortfall in contractors’ net profit.
How to determine ‘reasonable care’: two components of determination
This determination of whether individuals who work through their own company fall inside or outside of IR35 should be made with ‘reasonable care’, an important factor in the process.
Having spoken to a variety of professional service firms, industry bodies, informed professionals and other specialist advisors on the topic, it would be remiss not to share an important observation:
There are clearly two elements to consider when making a ‘status determination’ that would lead to a fair duty of ‘reasonable care’. This includes not only the nature of the assignment/work that is required by the end user but also the nature of conduct executed by the provider of the service that delivers the required deliverables/outcomes required of the assignment/work.
Put simply, it is important to consider that HMRC will look at the way the contract for services operates. Upon reviewing the key factors of Control, Financial Risk, Mutuality of Obligation and Substitution, the end user should look at the procured solution upon making the determination, not just the detail of the assignment.
A true interim manager will demonstrate such working methods that could see an overall determination fall outside of IR35 due to the way they and their PSC operates. An interim will use their skill and knowledge to control the outcomes and deliverables required. They will identify as an external resource and will have several levels of financial risk and cost that would not be present in an employee relationship. An interim manager is selected for a specific task and is often under no obligation to accept other work than the agreed detail, often with the ability to provide a substitute and often required to incur costs prior to commencing any work.
It would equally be a consideration that a role that an end user may determine as being ‘outside IR35’ could in fact be reviewed as ‘inside IR35’ should the interim resource want to be treated as an employee with all the benefits and minimal risks that are associated in an employment relationship.
Oakwood Resources can help to accelerate your business requirements by sourcing interim managers who are assessed based on their skills and experience and who can work alongside you to deliver successful outcomes for your business operational needs.