Written by Martyn Valentine, co-founder and Chief Legal officer of IR35 Pro
One year on since the major reform to the Off-Payroll legislation for the Private Sector in April 2021 (more widely known as IR35), we can see it has caused chaos for hiring companies, recruiters and the contractor community.
But did you know it’s possible for hiring companies to engage self-employed contractors without the risks?
Since becoming a qualified Legal professional in early 2000, I’ve dedicated the past 15 years purely to IR35, immersing myself in the complexities of the legislation. I’ve worked with over 2,000 Clients, drafted over 6,000 IR35 contracts and successfully represented clients in over 100 HMRC IR35 enquiries.
It’s evident the Private Sector is yet to get to grips with IR35, a slow painful transition. HMRC themselves anticipated that two thirds of self-employed contractors would remain outside IR35, unaffected by the changes, however, the reality is too many companies have initially taken an overly risk adverse approach, restricting their use to a bare minimum and in some cases eliminating them entirely.
This is already proving an expensive and unsustainable approach, as the flexible workforce is integral to the success of any major business.
Research from The Association of Professionals and the Self-Employed (IPSE), highlights that self-employed contractor numbers have reduced by a third since April 2021.
Contractors have seen their income drop by around 30% when engaged inside IR35, leading to many to leave the profession for permanent roles with greater job security and employment rights. This supply and demand headache has led to swathes of contractor vacancies and significant project disruption.
All of this is avoidable if IR35 is managed correctly, including eliminating the risks.
IR35, a problem worth solving
The IR35 reforms actually present a real opportunity for companies to adapt and gain a competitive advantage.
Engaging contractors inside IR35 is estimated to cost hiring companies 25% more than they were previously paying. These costs are a combination of day rate inflation, significant employers’ taxes and workplace pensions.
To offset this cost increase, some companies have tried lowering the gross pay rate offered to the contractor, absorbing the employer costs within their original budget. This has proven unworkable, assignments are less attractive, directly impacting the calibre of applicants for any role and the client’s ability to retain them. Additionally, contractors who have historically worked on assignments outside IR35 are also now reluctant to take roles inside IR35 to avoid attracting unwanted attention from HMRC.
However, the converse is also true. If you adapt to working with self-employed contractors outside IR35 compliantly, there are significant benefits to be enjoyed.
While many companies are paralysed by the perceived risks of engaging contractors outside IR35, this is primarily due to a misunderstanding of the legalities.
It is no different to any other area of Law, if you don’t have the depth of legal expertise required you are going to leave yourself unnecessarily exposed. It’s too complex an area for companies to manage themselves. IR35 hinges on 20+ years of case law, constantly evolving, it’s too complex for a novice to be expected to apply correctly.
Hiring companies can eliminate IR35 risk if they take two simple steps
The positive news is that IR35 can be effectively managed and de-risked for hiring companies, enabling them to engage self-employed contractors without the concern of liabilities. There are two steps to achieving this:
- Satisfy HMRC’s requirement for ‘reasonable care’ with their management of IR35
- Ensure a 3rd Party always pays the Ltd contractor, even if you hire directly.
Step 1: Satisfy HMRC’s ‘reasonable care’ requirement
If you satisfy ‘reasonable care’ with the management of IR35, you pass the risk and liability of working with contractors outside IR35 to the ‘Fee Payer’, which is the company that actually pays the contractors’ Ltd company. Often this is the MSP or a Recruiter, but there are also companies that offer an affordable solution for all contractor payments, whether inside or outside IR35.
So what is reasonable care and how do you satisfy it?
Both the HMRC Employment Status Manual (ESM) and case law indicate that for reasonable care to be satisfied, IR35 must be robust and consistently monitored throughout the assignment. it is not sufficient to rely on software-based Status Determination Statements (SDS), an example of this are the recent penalties received by Ministry of Justice and Defra, having relied on CEST for their assessments instead of using expert guidance. The SDS is only the starting point, the assignment must be closely examined for material changes, potentially requiring a re-assessment and revised paperwork.
My experience of managing HMRC IR35 enquiries consistently confirms that the focal point is always the contract, statement of work and the working practices. The SDS is not relevant if it doesn’t align with reality, a situation that all too frequently occurs as the answers can be manipulated to achieve a desired result.
A simple solution is to engage qualified IR35 legal specialists to support the management of each IR35 assignment. HMRC explicitly state in their ESM manual that ‘using a professionally qualified advisor’ constitutes reasonable care. Once you’ve satisfied reasonable care, if you want to eliminate IR35 risk you need to take step 2.
Step 2: Ensure a 3rd Party always pays the contractors’ Ltd company
If you’ve satisfied reasonable care, you are now able to pass the liability and risk over to the Fee Payer, assuming there is one in the supply chain, likely a Recruiter or MSP. If you are engaging a percentage of your self-employed contractors directly, consider introducing a third party to pay them for you. For a modest cost, you can pass all IR35 risk across to them. If you opt to pay the contractors ltd company directly, you will retain the liability as you remain the fee payer.
The time to adapt is now
In reality, there is no significant IR35 risk to pass over If IR35 is managed correctly. Implement expert-led assessments, robust contracts and a change control monitoring process, and there will be no scope for challenge. It’s inevitable that some roles will always require inside an IR35 classification, however If HMRC anticipates two thirds of contractors should be working compliantly outside IR35, companies should be seeking the expert help and guidance to achieve this as the benefits are unquestionable.
It can also be risk free.
For the detailed legal explanation on how your company can eliminate IR35 risk, click here: https://ir35pro.co.uk/eliminating-the-outside-ir35-risk/
About IR35 Pro
Martyn Valentine is the co-founder and Chief Legal officer of IR35 Pro, a unique fully managed service for IR35 that takes responsibility for the entire end-to-end process. Using their workflow software, they manage contractors for clients of all sizes, maintaining an audit trail and supporting clients on any HMRC inquiries. To learn more, visit www.IR35Pro.com