IR35 and the Private Sector: How to Prepare and Protect Your Business
December 1, 2018 | 2:00 PM - 3:00 PM EST
Emily Stringer, Consultant Services Advisor, MBO Partners
Fergal Lennon, Managing Director, MBO Partners UK
Kevin Barrow, Partner at Osborne Clarke
Mark Stringer, Business Development Director, MBO Partners UK
00:03 Introduction of MBO Partners
02:21 Opening remarks and introduction to IR35 by Fergal Lennon
05:02 Introduction of speakers
06:06 New tax developments affecting users of contingent workers in the United Kingdom
06:18 New factors affecting the use of contingent workers
09:11 Worldwide concerns about tax and contingent workers
11:56 The position of tax developments in the United Kingdom: Historically, currently, and in the future
19:05 How will the new IR35 work in the United Kingdom
23:33 Market response to the new IR35 measures
34:55 Growing concerns about contingent workers risk issues
35:56 5 tangible ways to prepare for IR35
54:36 Overview: Critical success factors
59.38 Closing remarks
The IR35 is the United Kingdom’s (UK) anti-avoidance tax legislation that is designed to combat tax evasion and assess the legitimacy of contractors in corporate firms. Stakeholders must fully understand this legislation’s specifications to protect businesses and independent contractors from additional income tax and National Insurance Contributions (NIC).
The recommendations provided by the key speakers of this webinar can help you take advantage of this legislation, improve your business operating processes, and provide job security to multiple individuals.
In this exclusive webinar, Kevin Barrow, Partner at Osborne Clarke and a prominent legal authority on the staffing industry, is joined by Fergal Lennon, the Managing Director at MBO Partners UK, and Mark Stringer, Business Development Director at MBO Partners UK.
The key speakers addressed the legal changes IR35 will bring and the impact these changes will have on firms. They also provided practical advice to business leaders.
This Q&A-style discussion talked about:
- The contribution of contingent workers in the growth of flexible workforces
- The challenges experienced by staffing agencies for being liable for the Pay As You Earn (PAYE) tax and National Insurance Contributions (NIC) of the contingent workers who failed the IR35 tests
- The power dynamics and cost-effectiveness of the IR35 legislation
- The development and communication of behavior control policies with necessary stakeholders
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[00:00:04] Emily Stringer: Hello, everyone, and welcome to today's webinar--IR35 in the Private Sector: How to Prepare and Protect Your Business.
Hi, my name is Emily Stringer, and I will be moderating the webinar today. A little background on me, I've been with MBO for eight and a half years, working as a consultant services advisor. Here at MBO, we are contractor compliance specialists and our chosen compliance partners for the world's most iconic brands, including a third of the Fortune 100. Through our service-based solutions and supporting software, we have been helping large enterprise clients navigate the complexities of engaging independent talent for over 20 years. Now for some housekeeping on today's webinar set up, first and foremost, you can see the controls listed here. Secondly, we will be emailing a slide deck and a recorded copy of the entire webinar to all registrants within the next week. Last, we encourage you to use the questions field throughout the presentation for a Q&A at the end of our hour together. Any questions that we do not yet do will be addressed via email after the presentation. If you want to follow the presentation on Twitter, use the hashtag MBOWeb to submit your questions and comments at MBO Partners. At this time, it is my pleasure to introduce you to MBO UK's managing director Fergal Lennon. Fergal is an experienced M.D., S.D., and business entrepreneur with over 25 years of business achievements in accounting practice and in the professional services industry. He has a proven business and accounting background with multinational companies in the UK. Fergal's leadership and vision have been instrumental in positioning MBO partners as the market leader, an independent contractor compliance for corporate clients in the UK. Fergal, at this time, I'll turn it over to you.
[00:02:21] Fergal Lennon: Thank you, Emily, and welcome, everyone to today's webinar. As Emily said, the title of our webinar is IR35 and the Private Sector: How to Prepare and Protect Your Business. I will be joined by two speakers, Kevin Barrow of the legal firm, Osborne Clark, will give a legal update on changes and risks from a legal point of view and the impact of them. And my colleague Mark Stringer will then share with those five tangible ways to prepare for these changes. And I suppose if we look at IR35 it has been around for nearly 20 years, and if the changes that were announced in the budget recently mean that the way that it will be policed has changed significantly and will change significantly from April 2020. Now, these changes have been in the public sector since 2017. But at a high level, what it's going to mean for companies that engage independent contractors is that the responsibility of classifying the contractor, whether they are really in a business to business relationship or should be paid as an employee, will now be with the user of the independent contractors. So previously that classification was done by the personal service company themselves. And Kevin will go into this in more detail later on. But this change is very significant for businesses because it puts the risk to the end user. It transfers the risk for the end user. And this is something that has been flagged for some time by HMRC. And they obviously have moved into the public sector with this a number of years ago. But it was well signposted that this was going to move into the private sector. The one good new good thing about this in terms of news and the good news is that they did delay it until April 2020, which gives businesses time to get prepared. And businesses will need to use that time because those businesses that have a lot of independent workers and rely on independent workers will need to make significant changes and will need that time to help them to be ready for April 2020. With that, as I said, I'm joined by Kevin Barrow, who is our legal adviser at MBO partners, and Kevin is a partner at international law firm Osborne Clark, and he is a leading expert on the contingent workforce. He has advised on 25 to 50 MSP and RPO programs per annum, advising staffing companies and MSP programs in 45 countries. He's been involved in all of the major consultations with HMRC going back since the start of IR35 when it was introduced 20 years ago, and Cabinet Office consultations. Also the Taylor Report have meetings with Matra Taylor in relation to that. And also Kevin and his team are the partners of the staffing industry analysts for the UK and Europe. So with that, I'll hand you over to Kevin.
[00:06:02] Kevin Barrow Well, thank you very much, Fergal. So the thing I'm here to talk about is the tax developments affecting users of contingent workers in the UK. I'd like to start off by putting some context on this, as I think everyone involved in engaging contingent workers is aware. There's a lot of focus on the whole world of geek working and the gig economy and flexible workforces and agency workers. And it looks like various things are going to happen even without a focus on the tax that might be due from them or in respect of them. Certainly, one thing we're picking up is that, you know, politicians are focusing on why voters appear to be angry and voting for various things that might otherwise not have been voted for. And, you know, they're focusing on the casualization of jobs, the precariousness of incomes. And they're looking in part that's the growth in flexible workforces and use of contingent workers as being a contributor to that. Alongside that, you'll have all seen the reported cases, lots of media coverage, coverage of cases involving Uber sports directly through. And the list goes on. And the government has many potential responses to that. You know, some of them, you know, some of the responses could involve requiring employers to reskill workers affected by, you know, the growth of artificial intelligence and various types of automation in the workplace, you know, other types of employment protection relating to people who are moving into a more flexible role, you know, focus on how young people can get mortgages if they're working on a sort of gig work type basis. All of this sort of thing has been covered by the Taylor Review and the Guardian Leads last month. The same proposals in some areas, which I won't go into now.
[00:08:27] Kevin Barrow I suppose the final point I'd make in relation to the general context about the use of contingent workers is, is that Sir David Metcalf, head of the Labor Market Enforcement Authority, has recently said that in his view and he's not talking about text, he's talking about all other types of liabilities that might be owed to these workers. He said joint liability should be introduced to ensure that lead firms, which means end users, bear some responsibility for what goes on in their supply chain. And he's referring to things like national minimum wage, holiday pay, you name it. So that's the direction of travel. And it looks possible that HMRC will be involved in enforcing holiday pay as well as tax, by the way. And in all of that, there's not much credit given to the fact that quite a lot of workers seem to actually like working on a contingent or flexible basis. And quite a lot of employers, you know, that's how they're growing and how they're giving people increased opportunities of earnings. There isn't much coverage of that. So that's the general context.
[00:09:52] Kevin Barrow: But what about tax? Well, you know, alongside this, there is a definite move worldwide in relation to the increasing use of nonstandard employment models, it's still the case that in most countries or at least countries which don't have huge oil wealth, the most government revenue is still mainly collected via workplace taxes, which in the UK means PAYU and NICs. And it hasn't escaped the attention of treasuries around the world that if more and more people don't work as traditional employees, then it won't be so easy to collect this main tax that most countries rely on. And that's led to all sorts of actions around the world. The UK is not alone. So, you know, those who follow the US will be aware of, you know, substantial worker misclassification claims that major companies suffer from time to time. This stuff going on in Germany, we've dealt with very large claims in Germany by usually relating to Social Security and pensions rather than tax, but it all arises from the same thing and similarly across the rest of Europe. And in fact, we've just started a big one in Belgium. So, you know, this is something going on around the world and then the U.K. has come to the party as Fergal flags, you know, it's been mentioned over many years that there should be some sort of action to attack the tax status of independent contractors, usually operating via a personal service company in the U.K. and the 2018 budget announced that there would be an extension or a substantial amendment to IR35 from April 2020.
[00:11:55] Kevin Barrow So what is the current position even before we look at what the future position will be? Well, the reason why the Chancellor's announcement in November about IR35 changes in the private sector from 2020 was, you know, big news is that historically the risk profile for end users for hire is of contingent workers in the U.K. has been very low. We are a benign environment for the engagement of independent contractors compared with nearly everywhere else in the developed world. And that's because the main tax measure, the current IR35 regime in the private sector basically makes the contractor liable. And then users have very, very rarely any risk. They can just turn, if you don't mind me saying and knowing blind eye to what goes on in their supply chain without any risk of claims by HMRC. HMRC has to pursue the individual contractors. Now, there are some exceptions to this, but they're relatively rarely invoked by the authorities. You know, just just to flag up those of people listening in to this. You know, there are some claims starting perhaps with the bottom one on that slide. We have seen a number of major companies receive regulation, they see assessments in the last couple of years relating to contractors who were paying themselves for some sort of offshore entity. And under the existing legislation, that liability can pass up to the higher up. And, you know, there are various other sorts of liabilities that can apply under the intermediaries legislation. If you're paying someone as a personal service company actually turns out that their company hasn't been incorporated. They may be liable. And under the MSC legislation, if you encourage people into personal service company arrangements rather than just letting them make their own decision, you could be liable. All of these things, you know, could on rare occasions expose you to liability. It doesn't happen very often. So low risk at the moment. But the government is fed up and, you know, they've been flagging for some time. They're going to start doing something. You know, the recent trend probably started in November 2016. HMRC issued guidance for users of labor, which said, you've got to check your suppliers out. You cannot turn a blind eye to tax and or national minimum wage breaches in your supply chain. And I've pasted in the link to the government website, which explains that. Now, that's just guidance. It's not law. But obviously, if HMRC finds that you're not doing anything, they could start making your life a bit difficult. So that's the current position on HMRC sort of attitude.
[00:15:09] Kevin Barrow What else is happening? Well, in September 2017, even before there were these private sectors with IR35 reforms, the government introduced the Criminal Finances Act, which makes it a criminal offense for end users to fail to prevent tax evasion in their supply chain. There is a defense for them if they can show they've taken reasonable steps to prevent that excessive tax evasion, then they won't be liable. But that means they have to carry out those reasonable steps. And if they haven't carried out those reasonable steps, then they will be liable, even if they don't know about the tax evasion and even if they haven't directly benefited from it. And that's an unlimited fine. And it is a criminal offense, not for the directors, but for the company. You know, that means you have to carry out checks if you're an end user of your major suppliers and if you're paying people overseas via payroll partners. Of those Payroll partners. And, you know, it's something a lot of companies are now taking very seriously. Another measure that came into force towards the end of last year, because this is all coming at us in a bit of a rush with what's often called the enabling legislation, which makes you liable that this isn't criminal. This is civil liability. If you enable a contractor to sign up to some sort of tax avoidance scheme. What does enable mean? It's communicating any information about arrangements. And we see this more actually in the commercial industrial end of the market where you've got blue collar workers turning up on site and being told by the site owner, "Right. Well, sign up for this. You know, sign this contract here for this umbrella." and they'll sort you out. Well, if that umbrella's then doing some sort of aggressive tax avoidance, the November 2017 legislation could make the end user liable just because it's passed over the papers. So that's the existing position, which is already, you know, a bit more than it was three or four years ago in terms of risk for end users.
[00:17:44] Kevin Barrow What about the IR35 changes that we're now hearing about? Well, you know, as Fergal said, it's been flagged for some time. And the figure that has been sort of given for the potential annual cost to the Treasury of not taking action is 1.2 billion. I noticed they've actually increased that to 1.3 billion pounds per annum just recently. And governments generally, if they identify a loss like that, don't tend to ignore it. They take action, not least because if they don't take action, then whatever party is in opposition will say they're soft on tax avoidance. And, you know, there is a perception that because changes were made in this whole area of IR35 in April 2017 for the public sector, the public sector is now having to probably pay more for its contingent workers because of the new tax burden. They're under the New Age, IR35 reforms there. And that's just not fair. That seems not fair. So it looks like something's going to happen. And indeed, that's what was announced in the budget this year, a month ago. There is an exemption for small companies, which means if you're an end user with fewer than 50 employees and roughly 10 million turnover or 4 million pounds balance sheet strength, then these rules will not apply to you. If you're a user of contingent workers, the old IR35 regime will continue to apply, which means that the contractors are liable, not anyone higher up the chain. But I'm sort of guessing, having had a quick look at the names of the companies on this webinar, attending this webinar, that none of you would fall within that exemption. Personally I'm not sure that exemption will actually be followed through in the final legislation, because it looks to me like it's a classic way people find a way of avoiding the regime. So how will the new regime work? Well, we think it's likely to mimic the public sector IR35 regime that was introduced in April 2017. That means that well, really, in many cases, the staffing company or intermediary will be primarily liable for PAYE and NICs in respect of any contingent worker operating on a personal service company basis who fails the IR35 tests. But the legislation makes it clear that the end user will be liable instead of the staffing company or intermediary if the worker is actually inside. I think it fails the IR35 test. The IR35 tests, which as many of you will know, are just the basic employment status test. But nevertheless, the workers pay gross and the end user has failed to communicate. So the staffing company, its assessments of whether or not someone is inside IR35. So under this new regime, the end user will be obliged to carry out an assessment and to communicate that assessment to the intermediary bar, which engages the personal service company. If it fails to do that and the person is then paid outside IR35, i.e. their pay gross without any deduction to pay the NICE's and their actions and they actually fail the IRS five tests, then the end-user is liable. Equally, the end-user is liable if it carries out an assessment and just gets it wrong. As a result of which the intermediary below pays the worker in good faith without deducting play around an eye sees. A third way in which end users can be liable is if they assist someone inside, they are 35 and they say to the intermediary or staffing company below, we think they're inside are 35. And the staffing company or intermediary says, OK, but can you tell us within 31 days why? And if the end-user fails to give reasons for why it's assessed someone as. Inside, I think five, then the end-user will be Lavall. And what happens if there's no intermediary? Well, in that case, you know, it's the end-user just has to make if it's directly engaging personal service company contracts and the end-user will be primarily liable and just has to get it right, has to make the right assessment and and and can't expect anyone else to take the hits.
[00:23:17] Kevin Barrow And so we saw these changes broadly being rolled out in the public sector in April 2017. We were heavily involved in that. And we advised I don't know how many different entities about it, but it was a lot. How did the market respond and does this give any clues to how people involved in this webinar will, you know, respond or, you know, what experiences they will have in April 2020? Well, the thing that got a lot of publicity and perhaps, you know, people listening in will think, well, of course, this is going to happen with a lot of blanket assessments on a safety first basis that everyone, all contingent workers were inside. All personal service companies were inside. I was 35 and that was communicated to any intermediaries. And the intermediaries just had to make the deductions or, you know, find some other way of engaging the workers. That did work in the public sector, certainly for a lot of the volume, so loads of nurses, loads of teachers, loads of care workers were arguably inappropriately operating the personal service companies, and they were just blanket assessments from the relevant public sector bodies saying, well, not anymore. You can't. You are inside. I am five. And not many of them argued. I mean, there's possibly an argument that community nurses are outside. But, you know, broadly speaking, it's hard to argue. And they just took it on the chin, except for something I mentioned in a second. But for the contractors who had sort of transferable skills and could work in the public sector, so in the private sector, they tended to argue their case or the intermediaries for which they worked argued their case. And there was some giving way by public sector entities who said, OK, we won't just be a blanket. Everyone is inside with them because otherwise we're going to lose the talent to someone else. We're going to have a chat. We're going to have to look at our assessments. And a number of them were eventually assessed as insider 35 or not within the IRR 35 regime at all. Were there lots of challenges? I've mentioned that the legislation does allow for challenges by staffing companies. In fact, in the public sector, there weren't many staffing companies that didn't ask for explanations of why the assessment was made. I think they felt that the end users just wouldn't really it wouldn't make any difference. It wasn't worth the bother. We think that in the private sector there will be more challenges and there are already signs that people are gearing themselves up to do that. The other thing that's worth noting about how the 35 measures may work in the private sector is that the government proposals set out in the summer of summary of responses from the revenue from HMRC on 29 October 2018, issued at the time of the budget, have said that the legislation may be changed for the private sector. So the end users are required effectively and are not allowed to do a blanket approach. They've actually got to exercise care when assessing someone is inside, as well as obviously not recklessly assessing people as outside.
[00:27:15] Kevin Barrow So what else happens? Well, you know, contractors like these nurses we've just mentioned who have been operating through personal service companies didn't always just take it on the chin. They were then instead of just accepting they should have been organized, since deducted they were seduced into a range of completely implausible, highly aggressive tax avoidance schemes. I'm not saying every single nurse in the country is doing this, but a very high number, a surprisingly high number have been seduced into some very dodgy schemes, you know, offshore elements, lone elements. I don't want to go into the detail of it. You can look on HMRC website for some of the details. We think that will happen in the private sector as well. And people involved in introducing, you know, preparing their companies for IR35 are going to have to put in place not just measures to comply with IR35, but measures to prevent use by their contractors and their supply chain of worse schemes. Because don't forget, the Criminal Finances Act and other measures could make you liable for those schemes, not just for IR35 compliance. Another thing, of course, that people will have seen in the press, no doubt, is exemplified by the BBC stories in the public sector. There were a number of people who had been operating on personal service companies up to April 2017, who, the day after the legislation changed, were assessed as inside by their employers. He'd never taken an interest before to expose those BBC presenters to retrospective claims by HMRC who effectively were able to say, well, we now know from your end-user that you are inside IR35. That means that the end user is liable from April 2017, PAYE. And the BBC said, "no worries will do that." But of course, what's happened is the BBC has issued a determination and assessment which can be used in a tax tribunal, proceedings by HMRC to say, well, if they are inside IR35 now and the BBC is paying up now. Well, they were inside for all of the time before when they weren't, but when the contractor was liable but wasn't paying any tax. And that's what led to a lot of these BBC type claims that you will have read about. Now, that could happen in the private sector as well. And one thing you need to watch out for is what we call straddle risk, trying now even 18 months out, not to be appointing contractors to assignments which could extend beyond April 2020. They've all got to have natural expiry dates in February, March 2020, so that, you know, you can issue something new from April 2020, which doesn't necessarily expose anyone to retrospective claims.
[00:30:38] Kevin Barrow So next slide, please. Yeah, what else has happened in the past in the public sector? Well, we saw what we--
[00:30:56] Fergal Lennon We've just lost you, Kevin. We'll just continue on--
[00:31:13] Kevin Barrow who come in and will become contractual intermediaries in the supply chain below the end user and say, look, we will become the person who's primarily liable under IR35 will carry out an assessment on behalf of the end user of the status, IR35 status, of the workers and will effectively minimize all risks relating to our certified. There's a lot of interest in that. There have been some people looking at that on a sort of fairly more or less amateurish basis in the public sector. But we think that will get ramped up massively when the regime is flowed out into the public sector, into the private sector. Alongside that, we're seeing a lot of contractors move to the genuine statement of work type supply arrangements. So historically, personal service company contractors could just work on the time of materials basis, not really take much business risk, you know, be not really in many ways be seen to be a real independent contractor working, you know, without using discretion and not under the control or supervision of the end user. What we're seeing is many now looking at moving away from that towards output based contracts where they get paid some or all of their fee based on successful delivery of the project rather than just on time sheets and stuff like that. There's going to be a big growth in that. In addition, we're just picking up lots of consultancies, including the big four who are suddenly realizing that this hugely affects their business model. They're big users of personal service company contractors. Quite understandably, it's been a great model, but obviously where they're supplying contractors to work for end users and effectively it's just a labor supply via them, then they will be caught by this regime and they will have to assess whether someone is inside or outside IR35 and probably have to deduct power dynamics, which could put up their costs of supply significantly. Unless, of course, the personal service company contractors are prepared to take a hit and, you know, reduce their Take-Home Pay. But many of them are saying, look, unless I can have the same Take-Home Pay, I'm walking. I'm going to another end user. I'm going through another intermediary who treats me as outside IR35. Generally, we do think the use of personal service companies in the private sector will continue after April 2020, perhaps not so much for lower skilled workers. And what we've seen in the public sector is a lot of those, unless they go into these very dodgy tax aggressive, aggressive tax avoidance schemes, you know, we've seen them. Some staffing companies have started employing them. We've seen indirect we've seen direct engagement models crop up, especially in the NHS, so that VAT is avoided. So even if you know more PY than IC this having to be paid, if the VAT is avoided, then everyone in the supply chain can sort of reduce the impact of the loss of, you know, the loss of Take-Home Pay. And, yes, a lot of workers in the public sector have moved to, you know, a pay basis of working.
[00:34:55] Kevin Barrow So that finishes me off, you know, major takeaways, this is coming, there's no political opposition to it, really. The UK has been a relatively benign environment for the use of personal service companies and other types of consumer workers, but that is changing. You can do something about it, but you need to start doing something now. We're seeing a lot of activity already. So thank you very much. And I wish you Fergal.
[00:35:25] Fergal Lennon Thank you, Kevin, for that very informative talk. We've had some questions about getting a recording of this and just let everyone know that a recording will be sent out to people who are attending this webinar. We're also going into a lot more detail, MBO Partners are going to release a white paper in the coming weeks in relation to this. And that will be made available to people as well. But what I want to do now is to move on to our next speaker, who will speak about the tangible ways for businesses to prepare for IR35. So the speaker is my colleague, Mark Stringer, who is the Business Development Director at MBO Partners. He has over 10 years of experience in the contractor compliance and recruitment sectors. He's been overseeing programs in the U.K. and in Europe and is now helping enterprises to navigate the IR35 changes. Now Mark has made some effort to be here. He's a baby boy, who arrived early about 36 hours ago. So we're glad to have you here, Mark and with that, I'll hand it over to you.
[00:36:41] Mark Stringer Thanks for thanks a lot. So welcome, everybody. As Kevin indicated here, the contingent workforce landscape is going to be a very different experience for both the contractors and the businesses that engage them between now and 2020. The legislation means that large changes of business and these aren't changes that can be started in January 2020. They require planning to start now. Now, to give you briefly a bit of background about MBO Partners for those that aren't aware. From our offices in London, we've been working with U.K. businesses to really help them prepare for IR35 for over two years now. And we have fully operational programs that apply IR35 principles to engage contractors. Traditionally, though, we have over two decades of experience operating in America. As of today, I'm aware the legislation reference is much tighter out there, with considerable risk already falling on clients and has done for many years. So well, that sort of really means from the perspective that we've got experience with these sorts of legislative changes and we're operating in markets that have them in place for many, many years. Now, from your perspective as clients, you've got different ways to choose how you handle the IR35 risk. So what I'm going to do here is really cover some that were like typical stages that clients have either been through or going through at the moment with our help. So this, again, needs to be covered in more detail, the white paper. But what we've done is break this down into sort of five key areas for project team conduct, internal audit, create guidelines for engaging independent contractors, make sure independent contractor classified and how we can contract. So in terms of forming a project team, but some of the job areas here are obvious, so I'm not going to sort of spend too long or go over these points. But a point to make a reference to is whilst not all of the project team might need to attend every single meeting, it is vital that you have the resources ready as and when they need it. The two sort of points I want to draw attention to, the first one, the Project Lead or the contingent workforce program manager, and they don't have to be the same. You might not have a CW program in place yet, but what you do need is vital for this. If you have somebody who's responsible for driving the project forward and it usually for more experience, works better if they are seen enough within the business to give it some gravitas.
[00:39:27] Mark Stringer The other sort of aspect I want to sort of hammer home is the internal senior level sponsorship and sponsorship. So, I mean, I can't stipulate enough importance of getting senior level Buy-In for this. The biggest sort of bottleneck that we tend to experience usually involves people and your sort of internal clients, internal aspects of change management. Compliance does mean change and people will always be resistant to that. So having someone who's senior to really help drive this through is really critical. Next slide please. Now conducting an internal audit, now, this can't appear to be a daunting task. First of all, don't worry, as Kevin made reference to, this isn't just about _______ that you're looking at the criminal finances as well that's often what's keeping clients awake at night. So what we have sort of experienced is a lot of our clients are using this added risk to their CWP program, CW program, as a way to really either mandate the program or roll it out wider or just tighten up the general policies and procedures in place because it's added an additional element to the contingent workforce. But rather than just being responsible for sourcing the best talent, there's now an added element of mitic or minimizing the risk involved with it. Regardless of your life cycle or the maturity of your contingent workforce program, you will have independent contractors engaging with your business in undetected ways. Now, it could be through a disguise statement of work, which Kevin made reference to earlier. It could be through non-PSL agencies or it could be through a management consultancy where you don't even realize you have an independent contractor working and analyzing it. Data is really going to be able to help you identify these contractors, but it really needs to be a part of the process where you're looking at closing these potentials for the back doors well in advance of the IR35 legislation come into play. But whilst you're looking at sort of identifying a data, you're looking at what sources you're going to use, who's going to be responsible, etc. that another sort of aspect that you need to sort of bear in mind is: it's really segmenting your workforce so internally and to make reference to it just internally here, you need to identify the business critical contractors. Once you sort of done this you'll also need to identify if they sort of fall into three sort of areas or if you use the terminology buckets, do they are they likely to fall inside of IR35? Are they in a bit of a gray area or are they to full or likely to fall outside of IR35? Because what this will allow you to start doing is having the conversations with finance well in advance for, for instance, are likely inside contractors. What is the process you're going to have to watch the discussions or conversations around the associated costs of a gross price increase here to ensure that they aren't worse off. If the business is critical you're going to want to keep. What are those costs going to be to your business and what's the process you're going to have to follow to get those signed off. For the contractors that fall into the gray areas, you can start discussing, are you going to have a price increase with them as well or are you going to move the engagement more outside of IR35? So as Kevin made reference to now moving into more of an SAW structure. That's all things you want to have a look at, but from this sort of aspect, it gives you a lot of sort of insight into the White House for the market. On to the next slide please. So creating guidelines for engaging independent contractors now, depending on the policies and procedures you already have in place, the likelihood is that you are going to have to develop new policy. When doing so, you have to sort of look at three aspects, they they need to promote enterprise wide consistency. They need to help minimize financial legal risk, and they also need to improve efficiency, which is often sort of part that fall aside. For instance, giving you that there's a tendency in the UK to treat independent contractors the same as your more temp based contractors or even your sort of permanent people. This is a best practice and this will have to change going forward. You need to sort of consider are you going to look at behavior control policy that should be communicated? How should it be developed? Sorry, how are you going to communicate it with the stakeholders and training. We've got Christmas looming, for instance, are all of your independent contractors going to the Christmas party? It's things to look at externally from that. Another sort of aspect to consider treating new contractors. Are you going to start developing a policy on how you're going to start engaging them? Some of the initial guidelines of who falls inside and outside the scope, will it just be PSCs or are you going to start including companies that have two, three or four less employees, for instance. So this will help save time from carrying out more detail to the classification of contractors you need or know that are likely to fall inside going forward. And the financial aspect to consider is how are you going to develop policies around a sign of procedure? How are you going to use to utilize these to really help shut the back door that currently and contractors are being engaged through? And this will help so try to not expand, but in a sort of a summary in order to drive to drive compliance, strong policies and procedures and also communicate effectively to help enormously. Becomes the next slide please. But making sure independent contractors are properly classified so classification policies will help minimize risk and engagement policy, will help reduce cost and time, cost and time of the new contractors. But something to bear in mind is you need to assess all factors affecting independent contractors engagement. So one of assessment at the front end asking a few questions. An online portal isn't sufficient. You have to look at various different sort of aspects involved in the life cycle of that contract day to day sort of aspects of it. It's it's not an easy task. There are a number of nuances around this, but you do have different set of options available to you. Internally are you going to look at the HMRC Cest Tool which I'm sure you will be all aware of. Because as a business, as Kevin indicated, you will have a statutory obligation now to carry out an individual assessment on the IR35 of all contractors by you using their services to be of any talent stream into the business. You will be responsible for your assessment of it. And if you are going to use it internally, you need to look at who's going to carry out these duties. Is it going to be a legal hiring manager? Bearing in mind that you're likely to get different responses from each. You have to understand how you're going to approach and coordinate assessments, as well as looking for the management of sites, not just from a one off perspective, but also from an ongoing arrangement as well to ensure that you minimize the risk. Next slide please. The other option is to outsource it to a business such as MBO partners, but basically they any sort of outsourced provider that fulfill your statutory obligation so they'll be able to fulfill it on your on your behalf and give you an opportunity to minimize the risks and liabilities. And typically, they should be providing insurance back indemnities and this will allow you to sort of have a scalable, outsourced option within that, that typically is two sort of options available for you. The intermediary can operate as a fee payer. Are you inside the chain with the money flowing through the contract through the intermediary, or they can operate more of a compliance partner, which means that be outside of the chain wouldn't have any structural changes to your current relationships. So the tier one recruitment consultancy would still only the engagement acceptable. There is sort of a couple of fairly standard options for you. Next slide, please. So regardless of what options, you're going to choose on how to handle your IR35 risk. What we've done here is put through a three stage tier with some time scales that you need to sort of look at.
[00:49:02] Mark Stringer So the first of the phase, really, you want to be sort of completing this by the end of quarter one, 2019. And this is where you implement your policies and procedures really to small pilot populations, going to give you the opportunity to really assess the nuances of the contractors, better understand the challenges, but also gives us an opportunity to really stress test the processes you've got in place. Now, phase two, quarter two, you really want to be getting this sort of implemented. You've got less than 12 months and this legislation comes into play. But you want to adopt this initially on the more sort of control of the street. So you want to look at tier one vendors, your tier one PSL recruiters, any management consultant fees that you use frequently and you've got good relationships with. And this will allow you to sort of identify the wider sort of bottlenecks or kinks in the process and really start to closing the back doors that you've identified in the audit. But this will be right around where you want to start incorporating your incumbents and then widening that widening that sort of process out. So phase three, quarter four, 2019, so really, you want to be having aiming to finish this by the end of 2019 to give you that sort of flexibility to to adapt and then make some changes that aren't really picked up in the first sort of rule under the policies and procedures that really start to feel more like standard practice by now. And it will give you a chance to really reassess those back doors, but also see if any more have arisen implementing new policies and procedures. Traditionally, people find ways around that, how has that sort of opened your business up to risk and these all need to be reassessed. You also need to have a continual process of reeducating the internal team so they fully understand the risk here, as well as the process to follow. But a good point to sort of mention is governance really is key here. The whether you're using an internal structure, whether you're using an outsourced model, they can only ever assess people that they get their hands on. So people have to be funneled into this program. The next slide, please. So in terms of a written contract that contracts are an interesting one, even with the current legislation, majority of businesses will have some form of IR35 friendly contract. Contracts are going to have to change from an entry expected that the number of different considerations that are in line that there's going to be changing relationships, has changed more engaged model, as new payment models, there's increased risk and liabilities that need to be accounted for in need to look at. Do you have contracts in place, deemed payments, et cetera, et cetera? And this is all sort of fair well, but what has become evident from a lot of sort of recent case law is that if the day to day operational aspects don't match what is written in the contract, the day to day aspects will take precedence. So this brings up some interesting sort of points. Risk--risk is a very good indicator that it's a business to business relationship and would therefore operate outside of IR35. But that risk has to be real. It cannot only exist in the contract if you're looking, for instance, at the risk to the contractor. If it is if you have written in your contract that it is their responsibility to make good, any unsatisfactory work that's delivered past deadline or just not up to the standard, does your business actually enforce it, has enforced it, or is it just in a clause? And the risk of substitution, the right to substitution, so is another one to consider. How does your business account for this? Is it just in your contract? Do you have examples where you have actually allowed a substitution? Is it workable? What processes do you have to support it? And do you having different contracts in place that allow you to engage people or do operate more constitutional note. Control is another sort of aspect that they're actually flexibility on how the work form or do your contract still say nine to five thirty must be on site. And if they are allowed to work flexibly again, how does your business facilitate that? How does that work? How do you enable your contract to do so? And statement of the statement of work, probably one of the biggest sort of subjects that's certainly been discussed with us since the announcement of this legislation. What we do find when we're reviewing a lot of it is contractors are hidden within an uncomplan state of work. So all your statement was actually deliverable base, the candidate, a clearly designed individual actually articulated and all the contractors paid to do. If they're not, I would be questioning whether this is a legitimate statement of work. But an efficiently run statement can provide enough rest for contractors to be operating outside of office for. And that's, if you like, take on the next slide, please.
[00:54:35] Mark Stringer So just to sort of overview here, some of the sort of critical success factors that we sort of highlight, first of all, start now, you know, sticking your head in the sand will not work with this legislation. You cannot wait. There's a lot of work to be done here. Senior level point is key. I still speak to contracts all the time. Whether this is an ongoing challenge to the people, part of the process, probably the biggest challenge to date. Track, measure your progress. If you don't track down how well you are doing. Communication, a strict communication policy, communicating this changes to your business. Probably more overly communicating it will be vital in making this a success. And also look at scalability, you know, whatever you're implementing has to be scalable. Can your program scale adapt to the likely changes? That's me I go to thank you for listening to this sort of section of it, and I'll pass you back to Fergal for any of your questions.
[00:55:37] Fergal Lennon Thank you, Mark, for that, for all that information. And just to let people know that they will receive a recording by email on Friday. We have had a number of questions in and a number of comments in, so thank you all for doing that. And any ones that we don't get to, we will respond to individually after. One question, though, that has come through. And what I will do perhaps is for you, Mark first and then move it on to Kevin, perhaps that you might be able to answer: what are the biggest challenges clients are facing to prepare for the changes?
[00:56:25] Mark Stringer I mean, still was the senior level guy is still a sort of a critical sort of element. It's the people that are quite often resistant to the change that probably one of the biggest part is getting. The processes and systems you can put in place can be tightened. Its getting the change management and probably the the biggest challenge internally that I'm seeing from my side.
[00:56:50] Kevin Barrow I agree, I agree with that and those two points, plus I think if people are looking at statements, genuine statements of work as a way of keeping people outside IR35 so that they can continue to be paid on a tax efficient basis and see the end users don't have to gross up pay rates. A lot of work has to be done. You really have to do a lot of work to reengineer supply models so that it's genuine statement of works. Don't underestimate how much work there is, but it is definitely worth looking at. It's just you need to do it properly.
[00:57:33] Fergal Lennon Thank you, Kevin. Another question for you, Kevin. What is your experience for what a company is doing in your experience to prepare for this? I know it's only literally a month announced from now.
[00:57:47] Kevin Barrow We're seeing, you know, some of them, the ones I've seen anyway, are doing some of the things that Mark mentioned. You know, they're getting teams together to assess what they are, what their opportunities are, what they should be doing. They're trying to work out, you know, where their contracts are, including what Mark said, you know, all of these consultancies and stuff like that. So they're beginning to take steps. And I think one of the reasons they're doing that is the more sophisticated ones are aware that if they don't start announcing their plans fairly soon and appearing reasonably attractive to contractors, contractors leave and go to an end user the where it looks like they're going to be able to operate outside IR35 after April 2020. And also people are worried about if they don't take steps now, contractors might be seduced into some of these very aggressive schemes, which, make no mistake, they are beginning to be approached about. They're already the providers of these schemes are already out there trying to find new candidates to go through dodgy schemes. And if the end users don't put things in place now, they're going to lose people even before April 2020 to dodgy schemes or to competitors.
[00:59:13] Fergal Lennon Thank you and a question for you, Mark. What are the priorities to make this a success in terms of preparing?
[00:59:22] Mark Stringer It will be the senior level buy-in, the making sure that you've got a scalable program, making sure you've got the right team in place.
[00:59:36] Emily Stringer Mark, Kevin, Fergal, thank you all so much for the valuable content that we've delivered today, such a great presentation, so informative. I know our audience really appreciates everything that we've been able to share. With that said, we're going to put a quick poll up on the screen so that we can ensure we are routing the correct information to the correct folks. Would you like more information about IR35 from MBO Partners U.K.? Yes or no? We will give everyone about 30 seconds to chime in here so that we can get this information distributed. So we'll leave this up on the screen for about 10 more seconds. Looks like we are 50 percent voted.
[01:00:24] Fergal Lennon And while that's up there, Emily, I might just mention again to people about the white paper, because we're top of the hour and I think we're nearly ready to finish that we will be preparing the white paper, which will be in more detail on what we've discussed today and that will be available in the coming weeks. And also to apologize for the builder who chose to start work at one o'clock right when we were starting in terms of the interference at the very, very start of our webinar. Thank you all.
[01:01:01] Emily Stringer Great. Thank you, everyone, for joining us and to our wonderful participants here today, really appreciate sharing the information. Thank you