April 2020 will see major changes to the intermediaries’ tax rules, or IR35 as they are commonly referred too. From that date the responsibility for determining whether the IR35 rules apply moves from the service supplier to the organisation receiving the services, known as the end client. Should they assess the status incorrectly then potentially the fee payer may be liable for the tax and National Insurance not deducted under the inside IR35 rules. Whilst the fee payer may not be the end client – it could be the agency that recruited the contractor – there will likely be contractual agreements between the parties that make the end client liable for the tax.
This creates a dilemma for the end client. Whilst wanting to retain the flexible workforce, they will not want to risk the potential tax bills, penalties and legal costs of HMRC later challenging the IR35 assessment. It is therefore inevitable that end clients will be conservative in their approach. Only the most clear-cut engagements will be judged as operating outside IR35, leading to a number of challenges. The end client must carefully consider how to deal with these.
Where the end client deems an engagement as inside IR35, they can expect the contractor to request a higher day rate to compensate for the increased tax burden they will face. This is going to increase the wage bill considerably. The end client can of course hold their ground and continue to offer the same rates of pay, however they will be in danger of losing the best talent, who will aware of their own value and what they feel they deserve in post-tax remuneration.
Another option would be to stop hiring contractors, opting instead to engage everybody as employees and only operate PAYE instead. This, however, removes the flexibility that contractors offer. With Brexit looming and the impact of leaving the EU (deal or no deal) still uncertain, the need for flexibility may become all the more important. Cutting their workforce in the future may become more complicated and also incur once avoidable redundancy costs.
Although it still carries the risk of some individuals being unhappy with the way they are assessed, the most rewarding strategy would be to review every contractor’s working practices and make case by case assessments. In this way they can be prepared to engage contractors outside IR35 where appropriate. The key is to follow compliance practices correctly and fully engage in the process. The reward will be continued access to high calibre contractors seeking equally attractive end clients to work with. It will also minimise any increase in potential future costs.
It would be prudent for end clients to start considering their options and begin planning for the future. Generally, most contracts are awarded for a period of 6 months. Therefore, any contracts offered from 6 October 2019 will require the end client to make an assessment as to whether these are inside or outside the IR35 rules.
We are already seeing tax departments relying on HR to make such assessments, and HR doing vice versa. Both believe the other is the proper team to bear responsibility. The truth is more likely to be that neither have the expertise inhouse to make such assessments and they should consider engaging external experts to make these evaluations and ensure compliance.