Learnings from the public sector. The NAO report “Investigation into the implementation of IR35 tax reforms” is far more balanced than HMRC’s recent attempt to mark its own homework. It also provides some very helpful learnings for how the new rules can be better managed in the private sector.

First, HMRC has recouped £100 million more than expected in tax receipts, which suggests that many public sector organizations placed more workers inside IR35 than was really necessary. This is a practice that private sector businesses would be advised to avoid in the current competitive environment for attracting and retaining contractor talent.

Second was the report’s coverage of HMRC’s Check Employment Status for Tax tool (CEST), with it clear that historic errors in use of the tool resulted in public bodies being penalized and handed significant tax bills. Although the House of Lords report goes into further detail on the challenges around CEST, the NAO’s recommendation is that appropriate training is put in place by businesses in order to fully understand HMRC’s guidance. As ever, any automated tool is only as accurate as the information fed into it.

Finally, the NAO report recognized that HMRC massively underestimated the ongoing commitment required by organizations to maintain IR35 compliance, with dedicated staff, independent review structures and formal approval at senior levels recommended as best practice. While this may seem onerous, it will allow businesses to unlock one of the key advantages of centralizing responsibility for engaging with off-payroll workers: a more holistic view of status determinations both internally and in the supply chain. Organizations that follow this advice stand to benefit from improved access to a flexible workforce, while keeping a tighter rein on costs and compliance.

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Limitations of CEST. The House of Lords enquiry makes clear that CEST should not be a substitute for law, so companies that use the tool should understand their legal responsibilities for reasonable care and how to use CEST in this context. However, until we see an enforcement case come to court, there is currently little legal precedent for how these new rules should be applied, and CEST still appears to be the inaccurate yardstick by which compliance in the public sector is being measured.

The House of Lords recommendation to introduce mutuality of obligation considerations into the tool will be a great help, but only if, as outlined in the NAO report, people using the tool are fully trained and able to clearly interpret the rules.

Blanket bans. The House of Lords report recommends the HMRC to police the use of blanket bans – where contractors are put onto a payroll without assessing IR35 status – and blanket assessments – where a hirer deems all engagements as outside IR35. In a recent Brookson Legal survey of 500 business leaders responsible for IR35 –  Reassessing IR35: The unspoken opportunity for growth report – 25% of companies we spoke to indicated that they had used a blanket approach to status determinations. Whether HMRC heeds this advice or not, we would advise these companies to review this practice urgently to avoid losing out on talent to companies who are able to offer outside IR35 roles for the more skilled roles in their flexible workforce.

Looking forward. The House of Lords committee recommends the findings of the 2017 Taylor review be implemented more fully, which we support. A healthy economy needs a tax framework that enables access to flexible workforces for businesses, while valuing the vital contribution that genuine contractors make and the financial independence that they require in order to work effectively in this way.

The NAO’s and House of Lords’ IR35 reports provide useful learnings and food for thought for the private sector as it embarks into the next phase of its IR35 journey. Only by heeding the warnings surrounding reliance on CEST and blanket bans will organizations be able to recruit and retain talented contractors, and embed a compliant and robust IR35 solution that supports business growth.

MORE: The future of talent acquisition

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According to evidence presented to the House of Lords Finance Bill Sub-Committee, many businesses have invested considerable time and resource into implementing IR35 correctly. For those businesses, the end of HMRC’s soft-landing period will not be a significant cause for concern, but an opportunity to reflect and review their current IR35 solution. However, for others, it is a trigger point that will help ensure a robust and compliant IR35 approach is in place.

Some organizations are feeling a false sense of security, according to recent Brookson research of 500 business leaders responsible for IR35. Our Reassessing IR35: The unspoken opportunity for growth report found that while 87.6% of midsize to large companies believe they understand the “reasonable care” requirements set out by HMRC and are confident they’re compliant, many have relied upon questionable IR35 solutions.

For example, 47% of businesses relied upon HMRC’s Check Employment Status Tool for contractor status determinations, while 42% relied upon other automated online tools. However, online automated tools such as CEST have been found responsible for recent public sector fines – clearly demonstrating they are not fail-safe; as with any automated tool, they are only as useful as the level of skills and knowledge of the person using it.

A third of businesses also asked agencies (31%) or contractors (35%) to make IR35 status determinations. This is against the instruction of the new off-payroll working rules; we strongly recommend seeking a robust solution that can meet the needs of the organization as soon as possible.

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Reviewing IR35 Solutions

Positively, when asked in the fourth quarter of 2021, 25% of midsize to large businesses now responsible for the IR35 compliance of their contractors had already reviewed their solution, 31% planned to do so before January 2022, and a further 27% planned a review before April 2022. This clearly demonstrates the diligent approach the majority of organizations are taking to ensure compliance.

The end of the soft-landing also coincides with plans by 90% of companies to extend their use of contractors over the next 12 months to support business growth. This will see IR35 solutions increasingly replied upon, and where solutions are robust and compliant, could provide businesses with a competitive edge and the ability to offer roles outside of IR35 where appropriate.

However, 17% of businesses will not be reviewing their solution before April, 4% of which do not have an IR35 solution in place. This is concerning, particularly when considering the broader approaches that some businesses have taken to IR35. While 71% determined IR35 tax status of contractors via individual assessment on a contractor-by-contractor basis, 41% are also using more manageable role-based assessments and 25% have applied a blanket decision across their whole workforce or subsets of the workforce. By using a blanket approach to IR35 determinations, end hirers risk being left behind as competition for talented contractors continues to increase.

Ongoing Responsibility

Beyond the initial solution put in place for managing IR35, ongoing status determination checks will be necessary, which forms a key part of the end-hirer’s reasonable care responsibility.Data surrounding how often businesses plan to review the status determinations of their contractors was positive – companies plan to review contractor status’ each month (22%) or every three months (39%), while only 30% plan to review every six months and 8% once a year. Ongoing reviews of status determinations is a distinct feature of reasonable care, so it’s important that all hirers regularly review contractor determinations in case of role changes.

April marks a clear milestone in the private sector’s IR35 journey and provides an opportunity for all organizations to review the IR35 solution they have in place. This period of reflection will also enable end hirers to iron out any teething issues with their IR35 approach and be sure that it will provide an effective framework for accessing the benefits of the flexible workforce and importantly, will meet the needs of a growing and agile business.

MORE: The potential IR35 compliance/confidence gap

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Conflicting data. To uncover the impact of IR35 on the private sector, the House of Lords Finance Bill Sub-Committee undertook a review of the “off-payroll working rules.” HMRC’s evidence stated that most businesses find the new IR35 rules “easy” and “reasonable to apply.” Research of 500 business leaders by Brookson Legal reveals how HMRC might reasonably have arrived at this view, but it also sounds alarm bells that there may be a significant gap between confidence and compliance for some businesses.

Responding to our report, “Reassessing IR35: The unspoken opportunity for growth,” 87.6% of those responsible for IR35 in medium to large companies said they understand the “reasonable care” requirements set out by HMRC and are confident they’re compliant. For a large number of businesses who have invested time and energy into getting to grips with the new legislation, this will be the case. When exploring the solutions that a significant number of organizations have implemented, however, the warning signs become apparent.

IR35 approaches. One of the most common risks is reliance on HMRC’s Check Employment Status for Tax (CEST) online tool. Both the House of Lords Report and a recent National Audit Office inquiry into IR35 in the public sector have been heavily critical of the limitations of the tool. Placing trust in CEST has proven costly in the public sector, where recently Defra became the fifth ministerial department to be hit with an IR35 tax bill which totaled £48 million. Although HMRC continues to stand by CEST, this should be a clear warning sign to all businesses that it does not guarantee compliance.

Data from our report found that 47% of business relied upon contractor statuses determined through the use of CEST, while 42% used other automated online tools. While it is possible to make compliant status determinations for 80% of contractor roles using CEST — leaving 20% as undetermined via the tool — an accurate result relies on the knowledge and understanding of the person inputting the data, so training is key.

Of greater concern is where organizations have asked recruitment agencies (31%) and contractors (35%) to determine contractor IR35 status. The changes to IR35 clearly moved responsibility for status determinations to the end hirer, so this outsourcing not only buries risk and potential tax liability in the supply chain, but also goes against the new legislation.

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The scale and risk of hidden tax liabilities. Although our report found that rising contractor costs (53%), talent attraction challenges (42%) and project delays (42%) are now of greater concern to businesses than unforeseen tax bills (31%), the scale of the tax liabilities from IR35 should not be underestimated. IR35 tax bills have been issued in the public sector for several million pounds, where liabilities built up over a period of years while the organization believed it was compliant. Significant tax bills could leave a private business permanently affected, leaving it unable to recover or significantly altering its growth trajectory.

Attempting to sidestep this risk, some businesses — including 25% of businesses surveyed by Brookson Legal — have applied blanket inside IR35 determinations to contractor populations. However, this approach is both a direct contravention of the reasonable care guidelines and a barrier to skilled talent attraction. According to HMRC’s own estimates, only around 33% of contractors should rightfully have their roles determined as inside IR35. Furthermore, the House of Lords report has recommended that false inside IR35 determinations be enforced with equal rigor to those outside.

The way forward. HMRC will shortly transition into its enforcement stage for the new legislation. Even for businesses who are currently feeling confident, this presents an opportunity to revisit processes to ensure that they haven’t fallen into the confidence vs. compliance gap. Not only will this avoid costly tax bills by meeting HMRC’s threshold for “reasonable care,” but it will ensure access to the flexible workforce to support growth.

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So, let’s explore the next steps on the IR35 journey.

It’s Not Too Late for an Effective Solution

For businesses that have not yet implemented a solution, now is the time to act. By seeking expert advice, effective IR35 processes can be implemented which will help prevent skills shortages and compliance issues further down the line as well as a surprise tax bill and HMRC fines.

Some businesses will have implemented a rash IR35 solution to get something in place ahead of the deadline. In doing so, it is likely that corners have been cut, such as making status determinations using online automated tools, ineffective use of “statements of work” in attempt to transfer risk, or even asking contractors to submit their own IR35 assessments. However, many of these quick fixes leave the real potential of hidden tax risk in the supply chain that could be discovered at a later date. While HMRC will waive financial penalties during the first 12 months, where there are genuine mistakes with the legislation, they will still be looking to recoup any tax revenue due and penalties will be imposed at a later date.

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Added to this, many organizations introduced blanket bans on the use of contractors, but with the pandemic recovery on the horizon and a flexible workforce key to meeting increased business demand, this is not a sustainable position to take. A blanket ban would effectively see these businesses missing out on 60% to 70% of the contractor talent pool that would otherwise fall outside of IR35 in a status determination.

Now is the time for businesses to take a step back and evaluate whether their IR35 solution is truly fit for purpose. It’s not too late to implement an effective policy that ensures compliance and access to the best available talent.

Business as Usual

For those businesses with a robust IR35 policy in place, the next milestone on the IR35 journey is embedding this completely new approach to contingent workforce management into business as usual. This means that new processes will need to be incorporated throughout the organization to provide continuity and highlight an ongoing demonstration of reasonable care with the new IR35 rules. For example, to avoid any unexpected tax bills or HMRC fines it’s also vital to maintain visibility of the temporary workforce and the potential risk throughout the entire supply chain on an ongoing basis as well as regularly reviewing the status determinations that were put in place for April 6.

The IR35 deadline may have passed but the journey is still very much in its early stages, with the real changes to business as usual and contingent workforce management now beginning. Regardless of how far down the road your business is, it’s not too late to seek expert support and guidance to implement an effective IR35 policy and process. By re-evaluating existing approaches and fixing any mistakes now, businesses can be compliant and have access to a flexible workforce to support business growth.

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Whilst the demographic and engagements of your contingent worker population may be a stark contrast to that of the Uber case (Uber vs. Aslam and others), all businesses should consider the wider impacts of this case on the classification of contingent labor.

The Supreme Court recently found that Uber’s drivers are indeed workers and not self-employed. The classification of these workers could have a number of carry over points and wider implications that businesses should be aware of in the run up to April 2021.

The level of control applied by the end client. The control framework that the Supreme Court felt was applied (at the time) to the workers via Uber played a major factor in the outcome of this case. Jump forward to post April 2021 when HMRC assess your contractors against the principles of IR35,almost identical considerations will be applied.

By the time April 2021 comes, some businesses will have been planning strategically for years on the implementation and even used it to their advantage on “the war for talent”.  On the other hand, many businesses will have just limped over the line.

From a “future state” perspective, what is the strategy of your business for contingent workers? Does your IR35 program have a Phase Two?

With this point in mind and considering the importance that a control framework plays in creating working practices supporting the use of independent contractors, what has your business done to consider theirs?

PREMIUM CONTENT: IR35 Off-Payroll Working Rules: FAQs for Suppliers

Some useful questions:

• What steps has your business taken to assess the “current state” control framework in place within its business areas? (Notice I said business areas, as it can often change throughout different areas of the same organization.)
• Does this current framework apply the appropriate degree of control to the appropriate engagement to support the compliant use of independent contractors?
• If it doesn’t, then is this limiting your businesses’ use of independent contractors?
• What impact will this have on your business?
• What is the potential IR35 risk this is creating for your business?

Consider in-place contractual arrangements. Another point clearly with a transferable consideration in terms of April 2021 is that the Supreme Court felt that the contractual arrangement did not represent the operational day to day workings of the engagement.

When applying this to IR35, this is an important consideration as it enforces that businesses cannot assume that due to the “correct” contracts being in place, they are protected against the risks of IR35 post April.

Consideration needs to be given to how this engagement between the client and contractors actually works. What are the working practices of the contractor? How is the business delivering its services, what is the control framework in place?  Do the contractors actually own any delivery risk and is the right of substitution clause legitimate?

This point is particularly relevant when considering businesses and suppliers which are attempting to set up SOW (Statement of Work) structures which were previously Staff Augmentation.

The TAAR (Targeted Anti-Avoidance Rule) highlighted March 3 budget will be particularly relevant here where the sole purpose of the restructure and engagement is to move it outside of IR35 without any other commercial reasons.

As we approach April 2021 a good question to consider here is what is the next phase? What will become evident over the next year or so is the impact a businesses’ approach to IR35 will have on its ability to source and retain the talent it needs to remain agile in the ever-changing business landscape.

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