Fear and uncertainty around the impending IR35 changes in the private sector have been well reported, but it could present businesses with an opportunity. Accountants are in a position to advise them how.
In April 2020, IR35 legislation that currently only applies in the public sector will expand to cover the private sector, requiring medium to large-sized companies to determine whether a contractor falls inside or outside IR35 parameters.
Currently in the public sector, it is up to the contractor’s client to determine whether IR35 applies to a contractor, and if it does, they must add the contractor onto their payroll and deduct both income and National Insurance from their payment.
The same will apply in the private sector on 6 April 2020, resulting in organisations that will fall within the scope of the legislation working to audit their current use of contractors in preparation of the change.
The fears and uncertainty around this change have been well reported. High profile cases of BBC presenters being required to pay hundreds of thousands of pounds worth of back taxes have shown how contractors can be strung by IR35, and there have been calls for the government to scrap the legislation.
But are there positives that businesses can take from the change? Research from business management firm Sullivan & Stanley (S&S) suggests that IR35 could present an opportunity for businesses to review and improve systems, with 47% of the 500 organisations surveyed by the firm taking this viewpoint.
Kevin Corne, COO at Sullivan & Stanley, said: “A lot of businesses are looking at IR35 with a transactional lens and not taking into consideration its transformational capability.
“We believe that IR35, if prepared correctly, presents an opportunity to revolutionise operating models that future-proof firms, give freelance experts the recognition they deserve and change business for the better.”
However, the study also found a great deal of uncertainty among businesses, with 71% of respondents saying they were unaware that the IR35 changes were coming into effect on 6 April 2020.
IR35 presents businesses the opportunity to take stock of their workforce and consider its shape. Many businesses will have found themselves habitually hiring contractors when needed because it’s easy but can fail to properly monitor and measure performances.
With 47% of businesses responding to the S&S survey saying they hoped IR35 would present an opportunity, and 46% desiring a clearer working relationship with contractors, it is clear that this is an issue businesses feel they need to address. The best way to do so is a full audit of contractor relations.
A good first step would be to look at each contractor and determine whether it’s a role that can be brought in-house, and ensure that all have determination statements if keeping them on as external consultants is important.
33% of respondents said they would consider this option. Accountants can help in this regard, ensuring all tax affairs are in order when it comes to dealing with contractors.
Businesses often choose to employ contracts as a flexible way of bringing in the necessary workforce at short notice, with many firms operating with a ‘command and control’ model not suited to today’s economy. This practice could be limited by better planning and with a reshaping of the operating model.
More than half (54%) of businesses said that they were committed to changing their commercial model due to IR35, which would involve closing the loophole that allows firms to hire contracts through the backdoor.
A review of a business’s existing employment strategy is also advisable, including determining exactly what skills are required to drive a business forward and bringing existing contractors within IR35 rules.
With so many clients unaware of the of IR35 changes in April 2020, accountants need to work to ensure their clients are aware of the changes and plan ahead.
Speaking to Accountancy Age in October, Blair Adams, a partner in the employment team at Law Firm Winkworth Sherwood, said: “The prudent ones are planning ahead already. So they’re analysing their contractual relationships, auditing them, trying to classify them and trying to do the early-stage determination to see who fits in where,” he says.
“Then the really active ones are then going a step further, and they’re talking to the ones who may fall on the wrong side of the line, to negotiate some new sort of arrangement. For example, bringing them on as an employee, maybe some sort of worker status, depending on the role and position they’ve got in the organization.”
Not all are as interested as these model examples of clients however, with some not considering IR35 the most important issue that must be dealt with.
“I dare say there are just as many clients who are saying: ‘tell me in March – at the moment I’m worried about Brexit.’ It depends what’s on their agenda really,” said Adams.
His advice to businesses who want to avoid this situation in April 2020 is to start early and to focus on the relationships they have with contractors, which are through intermediaries. That is what is really being targeted by HMRC and this legislation.
“Businesses must upscale what their test for self-employment is,” Adams said. “The HMRC tool can help to analyse the contractor workforce because if there is any way they can hire people on through a different mechanism, in a different relationship that may work better for you than having to apply extra fees.”