Financially speaking, the difference between working outside or inside IR35 can be huge, with contractors operating inside the clutches of the legislation or via PAYE sometimes taking home up to 25 per cent less after tax. This works both ways, though, with businesses engaging these workers on the payroll incurring similar costs.
IR35 reform poses a number of other challenges to companies, aside from the need to carry out IR35 status decisions, the major one being the shifting of the risk, which will transfer from the contractor to the fee-paying party, which is likely to be either the end client themselves or the recruitment agency when involved.
The threat of being held liable for incorrect IR35 decisions (along with the perceived burden of carrying them out) has led some businesses to ban contractors altogether.
However, insisting that all contractors work via umbrella companies or become employees - which means the IR35 rules are no longer a consideration - are not the right ways to go about the reform.
They will see businesses needlessly absorb the costs involved with hiring employees. This is unnecessary given that in our experience 91 per cent of thousands of contractors Qdos have assessed on behalf of businesses - following a rigorous and independent IR35 status review - belong outside IR35 in our expert opinion.
Key steps
So if imposing blanket contractor bans and, in and worse, even non-compliant cases, deeming all contractors inside IR35 irrespective of status is not the right thing to do, what is?
And how can businesses compliantly implement the changes, making sure they mitigate the risk they will soon carry while retaining the skills and flexibility of contractors?
I’ll run through the key steps firms should take now.
Assess IR35 status with reasonable care
When the changes land on 6 April, all contractors - whether existing or newly engaged - must have had their IR35 status determined with ‘reasonable care’.
HMRC’s definition of ‘reasonable care’ is still, despite the release of detailed guidance, open to interpretation. But generally speaking it means businesses need to carefully consider the specific factors which lead to an IR35 decision. In other words, they cannot simply place all contractors inside IR35 - or outside IR35 for that matter - without having examined the details of the engagement.
There are a number of ways businesses can ensure ‘reasonable care’ - whether by engaging a third party specialist to assess the status of contractors or using HMRC’s Check Employment Status for Tax tool (CEST) - although I would strongly advise against relying on the government’s technology.
