How to prepare for looming IR35 tax rules

The off-payroll legislation comes into effect in the private sector in April. It will mean that the responsibility for assessing a freelancer’s employment status switches to the hirer. Construction firms rely heavily on consultants and subcontractors to get projects completed and they should be preparing now to avoid disruption to work and ensure smooth access to their talent pipeline.

The challenge for hiring firms is to navigate the new off-payroll world without exposing themselves to an excessive administrative burden or financial risk. While this topic is a new area for many firms and can invoke feelings of fear around uncertainty, an approach to compliance that mitigates risk and appeases all parties is not difficult to achieve.

> News: HMRC sets up more IR35 workshops

A recent survey conducted by IR35 Shield of more than 3,000 freelancers showed that almost half the market has been assessed already, leaving the other half needing to catch up and prepare. There may be just a few weeks to go but companies that implement a sound compliance strategy now will be able to continue to hire freelancers with confidence.

Identify your limited company freelancers

First, identify those freelancers who require assessing under the off-payroll rules. Enlist your recruiters’ help to determine only those engaged via a limited company whose contract goes beyond April.

Next, evaluate your workforce and group together freelancers with similar working practices or contracts. Adopting a quality off-payroll compliance solution or provider is crucial, as they will help identify engagements that pose an IR35 risk and can advise you on the practicalities of altering any working conditions to mitigate any risk across the workforce.

Key individuals could still be retained if contract rates were to increase to counter their tax hit, which in turn would limit disruption to projects

Using your adopted compliance solution, carry out an initial assessment of your freelance workforce based on the information at hand – the contract and the working conditions. The result will be key in informing the next steps, and answering questions such as: 

• What is the total extra bill due for potential ‘inside IR35’ freelancers?
• What status factors are imposing risk upon the company?
• What projects are at most risk from the off-payroll rules?

You will have to identify those who need to be retained at all costs and prioritise these engagements.

Consider all scenarios

Having sought answers to the important questions and identified IR35 risk factors, you will be ready to establish a plan for your workforce. You might find that certain policy changes to working practices help to mitigate IR35 risk and effectively allow some freelancers to operate ‘outside IR35’.

However, any changes made must be realistic, rigorously applied in practice and reflected in newly drafted contracts. Any contractual amendments that are simply window dressing and not part of the true agreement between the parties could rightly be dismissed by HMRC as a sham.

Where such amendments are not possible for freelancers to achieve ‘outside IR35’ status, further issues will need to be considered, namely:

• Which freelancers will be difficult to retain on an ‘inside IR35’ basis?
• How much would it cost to retain key individuals?

The off-payroll rules were always going to be a cause of conflict, and many freelancers will either disagree with a deemed ‘inside IR35’ assessment or seek opportunities elsewhere.

Key individuals could still be retained if contract rates were to increase to counter their tax hit, which in turn would limit disruption to projects. Ultimately, a financial plan is required to weigh up the relative costs and prioritise expenditure to ensure the impact of off-payroll on projects is minimal. Many firms believe that rates will not be increased when freelancers are pushed on to payroll – but the free market will have other ideas.

Communication and continued compliance

Having conducted a full IR35 status assessment, which needs to factor in the freelancer’s details, outcomes will need to be communicated. This is crucial to establish the plans of those deemed within the scope of IR35.

Any rate renegotiations for affected freelancers who plan on staying should be conducted at this stage, while those who are leaving will require termination notices. Many recommend that hirers engage ‘inside IR35’ freelancers via agency payroll, who may decide to outsource this process. Those who are to be offered an alternative operating model may need to be served termination notices for their current contracts before moving to something new. This needs to happen by the end of March this year.

And remember, off-payroll compliance is an ongoing process. Each contract renewal warrants a new status assessment, and monitoring of the workforce is required to ensure that working practices always reflect the written agreements.

Insuring against risk

It is important to know that firms cannot insure against the non-payment of tax, in the same way that you cannot insure against a speeding fine. Those firms that are concerned about the possibility of being struck by the equivalent of tax lightning should at least cover themselves with tax investigation insurance to help cover the costs of defending a position against HMRC.

Different groups of freelancers will carry different levels of risk and exposure. This is like insuring a fleet of Ferraris versus a fleet of Minis and any insurance should be priced around the measured reality for each situation. A one size fits all approach does not make commercial sense.

However, a note of caution: these types of insurance policies will rarely compensate where the claimant has not fulfilled their own compliance obligations and neither will an insurance policy remedy the reputational damage that a firm suffers when being dragged through a tax tribunal. Any insurance product must be underpinned by a robust compliance process.

Off-payroll compliance is paramount

The coming weeks are critical for those companies that rely on freelancers. Adopting a compliance-led approach is the only way to meet the reasonable care requirement and by taking a proactive approach firms will be able to hang on to their contingent workforce while minimising disruption to projects, mitigate against rising costs and keep their administrative burden at a minimum. Those firms which act now will reap the rewards.

Dave Chaplin is CEO of IR35 compliance solution, IR35 Shield and author of IR35 & Off-Payroll Explained