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Avoid Falling Foul of IR35 with Correct Contractor Engagement
With IR35 casting a large and formidable shadow over 2017 it's important to know how to correctly engage contractors.
IR35 prescribes that where the contractor-client relationship is similar to that of a traditional employee, the relationship is deemed employed for tax purposes.
Currently, The Government is planning to implement IR35 changes with the 2017 Finance Bill for Public Sector engagements. The responsibility for deciding IR35 tax status will shift from the contractor to the intermediary and where IR35 applies, the intermediary will be liable to report payments to HMRC under the RTI system and for the payment of employers NIC. There are still a lot of questions around the actual timing of the change and the details of the small print. However, there are yet more questions surrounding the appetite to implement similar changes in the private sector at a later date.
IR35 is a wooly beast. A lack of clarity has led to fear, which has only been amplified by recent cases in the news. For example, HMRC demanded back payments from the contractor, as was the case with two BBC newsreaders - a case they took to court.
However, contractors should take hope from this case, as the judge set out how IR35 status should be decided, which is to consider the individual facts in regard to what actually happened when the newsreaders worked, rather than the 'generic' detail HMRC usually relies on. The outcome of the case will therefore be based on the reality of working relationship, rather than the assumptions.
Clients may also have reason to worry. Lack of clarity and guidance on how to manage the legislation is seeing many in the public sector 'whitewashing' contractors with the same brush - forcing them to terminate the contract or become an employee.
The MoD's UK Hydrographic Office (UKHO) is one such example. Previously, the company asked contractors to secure an independent contract review to prove IR35 status - that they were paying the right level of tax.
With HMRC clamping down on IR35 rules however, UKHO began making tougher demands on contractors to ensure they didn't fall foul of the legislation. Contractors were asked to agree to be taxed in the same way as regular employees or cease working there from September 2016. The result has been a mass walkout putting several major IT projects at the MoD on hold.
Meanwhile, with the redraft of the Intermediaries Legislation, recruitment agencies must become well-versed in IR35 in order to accurately assess whether each contractor falls inside or outside IR35. Huge administration costs are on the horizon, hitting margins and increasing their risk of doing business. For example, new payroll systems and processes will be required. However, the much awaited IR35 assessment tool remains in shadows and there have been no definitive guidelines provided. All in all, the communication from HMRC to Agencies has been poor.
What can you do?
Public sector organisations can do much to check that they are engaging with their contractors correctly. Rather than causing panic, as some have, there are ways to gauge if your working practices, governance and contracts are compliant.
Reviewing contractor engagement practices can highlight and mitigate contractual issues within the supply chain; it provides accurate insight into who you have working on site, where they come from and how they are engaged and paid; and it can help you avoid third party debt-transfer within certain legislation.
The attainable outcome is the peace of mind that you have the processes, working practices and information in place to make sure you are compliant. It ensures you have back-to-back service-based contracts supported by the correct working practices and, in the majority of cases, the cost-savings are substantial.
Correct Contractor Engagement in Practice
Often, an organisation begins to reform contractor engagement practices when a problem is highlighted. In a busy role, we often need to see the fire before we can put out the flames (and achieve the buy-in to do so).
An enquiry from HMRC is one such cinder but other symptoms you notice may include:
- No cost control
- Multiple suppliers with high margins
- Spend on contractors is too high
- No internal capacity to manage the contractor base
- No governance around the management of the contractors
To begin to soothe these symptoms, seek expert advice, support and crucially resource. Complicated and time-consuming processes demand dedicated people-power.
Best Practice Solutions
Running a Contractor Audit will provide senior management with valuable data - data that will prove more than powerful (and reassuring) should HMRC come knocking.
An audit should provide you with accurate information on the current contractor base, and the tools, resource and expertise to harvest and present information in a culminating report. A virtual dashboard and detailed timeline of activity should be expected and the final report should be comprehensive, highlighting areas of risk and for improvement. Harvey Nash has been providing this service for over a decade.
Contract Review Service
Kate Cottrell, IR35 adviser, former HMRC employee and co-founder of IR35 and status expert outfit Bauer & Cottrell, is creating a review service aimed at public sector clients to enable them to check their engagements with contractors. http://www.bauerandcottrell.co.uk/
Ahead of this however, it is wise to prepare a communication plan. We only need glance at recent anecdotes regarding client-contractor communications where IR35 is concerned, to recognise how essential this is to the success of an audit and effective contractor management.
The right communication plan will ensure a consistent message is shared among all parties involved, that contractors are well informed about the robust process they are going through and gives them confidence in the change.
Correct contractor engagement can help you harness the value in your existing skilled workforce while shining a bright light on the cost, efficiency and opportunity within it. Should HMRC come calling and you, like the BBC and their presenters, are required to detail the reality of life as a contractor, you'll be well placed to do so. Ahead of April 2017 such foresight is to be admired.
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