The Impact of IR35 on UK Independent Contractors: 5 Ways Your Enterprise Can Begin to Prepare
IR35 is tax legislation in the United Kingdom aimed at classifying the tax status of self-employed professionals who work for public or private sector companies. The legislation is designed to combat independent contractor tax avoidance, and since its introduction to the public sector last year, it has been met with negative press and public confusion.
In light of the newly announced IR35 regulations, MBO hosted a webinar to discuss these legal changes, what impact they will have on businesses, and practical advice to help you prepare and protect your company in the UK.
The private sector changes are expected to follow the same line as the public sector roll out and will move classification responsibility and risk up the supply chain to businesses. The responsibility for undertaking employment status assessments will now be the responsibility of the entity using the services, whilst the responsibility for operating the statutory withholdings will be that of the entity paying the contractor.
The thing is, the tightening up of legislation like the IR35 is not specific to the UK. It is global. In the US and Europe, the liability of independent contractor misclassification often sits with the end client. Whilst the UK is in a very uncertain time with the forthcoming Brexit and is heading into a time where an agile workforce will be even more vital in enabling businesses to navigate these changes, it has been announced that the IR35 changes will be brought into the private sector in 2020.
How will your business prepare? Here are five considerations to keep in mind.
1. Form a Team to Assess Your Company’s IR35 Readiness and Handle Issues
Whether you have an established Contingent Workforce Programme (CWP) or are just starting to develop one, consider putting together a cross-functional programme team. This team will be vital in assessing and managing the forthcoming IR35 changes and risks.
IR35 legislation is complicated and evolving; this team can provide compliance advice, classification recommendations, and expertise on laws and regulations to ensure the right processes are in place now rather than responding to a larger issue retroactively. Generally, we see our clients include team members from the likes of HR, Legal, Compliance, Tax, and Procurement as well as members of their MSP provider to give a wide breadth of knowledge and input.
2. Conduct an Internal Audit
Carrying out an initial audit will allow you to delve into your current guidelines, policies, and procedures on how you engage your UK independent contractors and identify any potential areas of risk well in advance of the legislation changing.
Auditing your current independent contractor population will allow you to understand the roles they are delivering, the areas/projects within the business that they are working on, and the highest departmental users within this list. Depending on the maturity of your Contingent Workforce Programme, this itself can often be an interesting exercise and serves useful in devising a plan that addresses any internal policy changes your company will need to make to be in compliance with the new regulations.
3. Create New Guidelines for Engaging Independent Contractors
The results of your audit will enable you to start considering how to develop new or revised guidelines for engaging independent contractors, writing policy changes, and updating any procedures based on the forthcoming.
Your business may already have some basic outlines on who can and cannot be engaged as Independent Contractors in the United Kingdom. It is the role of your Contingent Workforce Programme Manager or designated person will have to liaise with numerous stakeholders in your cross-functional team as your company navigates required changes to your independent contractor engagement practices—from Legal to Tax to Human Resources and the Managers using independent talent themselves—to develop, refine, and enforce the policies that go into these guidelines.
4. Make Sure Independent Contractors are Properly Classified
Properly classifying independent contractors is not a straightforward task, but by making sure your classification policies are compliant with current laws, you can minimize the risk of having your workers be re-classified. Several tools and assessments have surfaced to assist businesses in classifying their workers, although the outputs of these tools generally produce results that do not inspire a level of confidence we believe to be sufficient for large enterprises.
One of the most commonly known classification tools is the HMRC’s CEST (Check Employment Status for Tax). Yet most comments from the public and the decisions of recent court cases suggest that this tool is not fit to use by large companies, resulting in more confusion.
Further adding to business uncertainty, more traditional IR35 assessments typically only consist of a contract assessment, which is insufficient and far from a best practice. To help you navigate and understand best practices for assessing independent contractor classification, join our webinar on the topic.
5. Have a Written Contract for All Independent Contractors
Next, a well-constructed contract is vital in engaging any independent contractor, as it outlines your working relationship and is a key element in best protecting your business. We suggest revisiting your existing contracts with a compliance expert who has an eye to the new changes.
Engaging independent contractors can be a confusing business. The more traditional compliance strategy of passing the liability down the supply chain is unlikely to stand up in the new world and, with the uncertainty around IR35, it will be even trickier for businesses to navigate.
The information provided in the MBO Blog does not constitute legal, tax or financial advice. It does not take into account your particular circumstances, objectives, legal and financial situation or needs. Before acting on any information in the MBO Blog you should consider the appropriateness of the information for your situation in consultation with a professional advisor of your choosing.