Demystifying IR35: Are You Ready?

Pascal d’Arc

If yours is a UK company or you employ contractors in the UK, IR35 is already high on your priority list – or it’s about to be. Reforms are kicking in, which will put a very different lens on how you are working with contractors, with a lot more responsibility on you as the “engager” of people and work. What does this really mean for your business? How can your organization comply with the new legislation? Perhaps most critically, how do you ensure that you continue to attract the skills of top external talent to keep your business ahead of the pack? This blog is the start of a series to answer key questions.

This has been a long time coming: IR35 is not a new concept. Many will already know that it was designed to identify individuals who choose to work under their own limited or umbrella companies to reduce their tax liabilities – effectively being a “disguised employee,” at least as the tax authorities see it.

Until recently, it was relatively straightforward to work as a contractor under a limited company, even if the contractor was working most or even all of their time for a single employing organization. Many would argue that the tax efficiency of this approach was part of the package that attracted contractors to take on the risk, and that the flexibility for workers and employers provided an important channel for organizations to engage their external workforce.

Either way, the regulatory framework is changing, and this needs to be managed carefully. The changes have already had some significant impacts on the public sector. It’s been estimated that the UK Treasury will miss out on approximately £3 billion in extra tax receipts from 2020-2025 if steps are not taken to enforce IR35 and the private sector is not brought into line, too.  So it’s no surprise that legislation is being tightened up to collect these taxes. To be clear, this is not just contracting in IT roles; it spans many professions from fintech freelancers and oil-industry technicians to independent professionals working in the broadcast media and entertainment industries.

April 2020 is the date when the obligation to make checks in the private sector will shift from the “contractor” to the “engager” (the hiring firm or manager). This now gives Her Majesty’s Revenue & Customs (HMRC) fewer – but larger – targets to target legislation against and recover taxes. In support of this, HMRC has recently released the Check Employment Status for Tax (CEST) tool for engagers to determine a contractor’s employment status. A similar tool has been used in the UK public sector for a couple of years now. Adoption of the tool has been slow, and there have been questions about the accuracy of the results. But organizations need to be ready – or face backdated tax bills with penalties on top.

Therefore, you should consider:

  1. Assessing all your current contractors

A material number of contractors that will be assessed by your business on the CEST tool will probably not pass the IR35 test. They will be seen as employees, not service providers. This may fundamentally change your relationship with contractors, some of whom may be critical to your business operations. Early identification across your business will help you identify, measure, and mitigate the risk before it’s too late.

  1. Looking into your supply chain

Domestic organizations in your supply chain will face the same challenge. It’s important to examine your critical supply chains and verify your extended exposure. The impact of letting a weak link in your supply chain go unmanaged may result in higher input prices if contracting mechanisms between suppliers and their contractors are changed ineffectively. There may be stock-outs if suppliers cannot switch over relationships in the first place, or unmitigated risks will lurk if they’re not managed proactively by a supplier.

  1. Taking an integrated approach

IR35 is only one of many employment-related issues to connect into your processes; the Right to Work legislation, DBS checks, Health and Safety, and more should be managed appropriately and with a single view. Considering the degree of change that is likely to occur when the legislation kicks in, having a blueprint that effectively integrates and automates these processes will enable you to move quickly and keep your operations running.

  1. Understanding the shifting work culture

With 42% of spend on people going to the external workforce, according to a recent study by SAP Fieldglass and Oxford Economics, the issues of virtual working, the gig economy, and zero hours have fundamentally changed the way work gets done. Much of this has been stimulated by millennials and Generation Z, who are less interested in an “employer for life” and are instead increasingly looking for diverse work experiences where success is defined differently. The increasingly fluid approach to work causes a real challenge for organizations balancing the growing framework of regulatory-based checks such as IR35 with the expectations of the younger workforce to have a fast and smooth on- and off-boarding experience.

We’re just scratching the surface here. If you’re interested in diving deeper into these topics and more as part of our “Demystifying IR35” series, join us at ValueX – Unleashing the Power of Spend.

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Pascal d’Arc

About Pascal d’Arc

Pascal is a senior director in SAP Ariba’s Centre of Excellence bringing innovative solutions to help customers find new areas of competitive advantage under the vision of #BusinesswithPurpose.