Private sector IR35 off-payroll working – 10 months on

Following introduction of the updated IR35 Off-Payroll Working legislation in the Private Sector 10 months ago, we can now take stock and reflect on how these rules have impacted businesses utilising contractors as part of their workforce and explore some recent developments.

Reminder of the changes

The government argued that non-compliance by Personal Service Companies (PSC) pre April 2021 under IR35 would cost the economy £1.2bn each year by 2022. This resulted in the changes doing three key things:

• Move the responsibility for completing IR35 assessments from the PSC to the ‘end-user’ of the PSC’s services
• Move the PAYE administration burden up the chain from the PSC to the fee-payer
• Introduce requirements for communication throughout the chain and a dispute process should the status determined by the end-user not be agreed with.

These changes were expected to bring a shift from outside to inside IR35 status, seeing an increase in the number of PSC’s being treated as employees for tax and National Insurance purposes via PAYE rather than through self-assessment.

Impact on businesses & contractors

As businesses have continued to battle the impact of COVID and the ongoing changes to restrictions, this reform has brought further administration and costs to businesses in ensuring compliance.

Despite this and the initial impact to long-standing contractors caught by the rules, AAB have seen businesses continue on with resilience, not letting this affect the delivery of key projects by ensuring that contractors are engaged as true off-payroll workers as far as possible.

On the other hand, it goes without saying that many businesses have taken more caution than may have been necessary due to the risk they are taking onboard where engaging contractors they deem outside IR35. This has therefore impacted the number of opportunities available to contractors and has seen many who do operate as genuine contractors suffer a significant impact on their take home pay where they have been unable to secure outside IR35 work.

HMRC Compliance Reviews

It was broadly known that HMRC did not have much of a taskforce in place to deal with employment status related matters, nor had they had much success in disputing status applied. However, in recent months where less of a focus has been required for COVID-related support, HMRC have ramped up their employment status team and have already started launching compliance checks into oil and gas based private sector businesses.

These checks have primarily focused on the application of the legislation and procedures businesses have implemented to adapt but can extend to individual status determinations if HMRC identify any gaps which could have resulted in non-compliance for tax and National Insurance purposes.

It is fact that employment status is notoriously difficult to argue with the status itself being based solely on opinion unless otherwise ruled by the courts. This means that any check launched by HMRC could span months or even years and so it is vital that the right people deal with any HMRC enquiries into the application of these rules. This could see a requirement to bring in external professionals in the subject area who can rely on both the legislation and case law to try and secure the best position for the Company.

This comes following the catastrophic liabilities and penalties charged to HMRC’s own departments due to non-compliance with the public sector reform from 2017 and so we would expect similar liabilities becoming due by private sector businesses. This reinforces the importance of having a robust process in place for managing contractors and applying the legislation both from the outset and on an ongoing basis to prevent any cracks allowing for failures to slip through potentially costing your business a sizable sum later down the line.

If you would like further information or require assistance regarding IR35 Off-Payroll working, please contact Megan McDonald or your usual AAB advisor.