Demystifying IR35: Are You Ready?

Either IR35 is already high on your priority list or it’s about to be. Reforms are kicking in that will put a very different lens on how you engage contractors, with a lot more responsibility on you as you engage people and work.

What does this really mean for your business? How can your organization comply with the new legislation? Perhaps most critically, how can you ensure you continue attracting the skills of top external talent to keep your business ahead of the competition?

This has been a long time coming; IR35 is not a new concept. It was designed to identify individuals who choose to work under their own limited companies or umbrella companies to reduce their tax liabilities rather than being payroll employees – effectively being a “disguised employee,” at least as the tax authorities see it.

Until recently, it was relatively straightforward to work as a contractor under a limited company, even if the contractor was working for most or even all of their time for a single employing organization. Many would argue that the tax efficiency of this approach was part of what attracted contractors to take on the risk and that the flexibility for workers and employers provided an important channel for organizations to engage its external workforce.

Either way, the regulatory framework is changing and this needs to be managed carefully. The changes have already had some significant impacts in the public sector and it has been estimated that the UK Treasury will be missing out on approximately £3 billion in extra tax receipts from 2020 to 2025 if steps are not taken to enforce IR35 in the private sector too. So it’s no surprise that legislation is being tightened up to collect these taxes. To be clear, this is not just contracting in IT roles, but spans many professions: from financial technology freelancers and oil industry technicians to independent professionals working in the broadcast media and entertainment industries, and more.

April 2020 is the date for when the obligation to make checks in the private sector will shift from the contractor to the “engager,” or the hiring firm or manager. This now gives Her Majesty’s Revenue and Customs (HMRC) fewer but larger targets to use the legislation against and recover taxes. In support of this, HMRC has recently released the Check Employment Status for Tax (CEST) tool for engagers to determine the employment status of a contractor. A similar tool has been used in the UK public sector in recent years , but adoption of the tool has been slow and there have been questions about the accuracy of the results. Nonetheless, organizations must be ready or face back-dated tax bills with penalties on top.

So consider the following:

  • Assessing All Current Contractors: A material number of contractors who will be assessed by your business on the CEST tool will likely not pass the IR35 test. They will be seen as employees, not service providers. This may fundamentally change your contractual relationship with contractors, some of whom may be critical to your business operations. Early identification across your business will help you identify, measure and mitigate the risk before it’s too late.
  • Looking Into Your Supply Chain: Domestic organizations in your supply chain will be facing the same challenge, so it is important to examine your critical supply chains and verify your extended exposure. The impact of letting a weak link in your supply chain go unmanaged may result in higher input prices if contracting mechanisms between suppliers and their contractors are changed ineffectively. There may be stock-outs if suppliers cannot switch over relationships in the first place, or unmitigated risks will lurk if not managed proactively by a supplier.
  • Taking an Integrated Approach: IR35 is only one of many employment related issues to connect into your processes; the Right to Work legislation, DBS checks, Health and Safety, and more should be managed appropriately and provide a single view. Considering the degree of change that is likely to occur when the legislation kicks in, having a blueprint that effectively integrates and automates these processes will enable you to move quickly and keep your operations running.
  • Shifting Work Culture: With 42 percent of total workforce spend going to the external workforce, according to a recent study by SAP Fieldglass and Oxford Economics, the issues of virtual working, the gig economy, and zero hours have fundamentally changed the way work gets done. Much of this has been accelerated by millennials and Generation Z, who are less interested in an employer for life and are instead increasingly looking for diverse work experiences where success is defined differently. The increasingly fluid approach to work causes a real challenge for organizations balancing the increasing framework of regulatory based checks such as IR35 with the expectations of younger workers to have a fast and smooth on- and off-boarding experience.

We’re just scratching the surface here. If you’re interested in diving deeper into IR35, join an upcoming webinar on January 22:


Pascal d’Arc is a senior director in the SAP Center of Excellence for Spend Management at SAP.

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