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What 2016 Taught Us About IR35: 10 Essential Tips

After closing the curtain on another year, what can we learn from the turbulent times of 2016? We held our breath on more than one occasion as we waited to learn the outcome of Brexit, The Budget and vital law suits affecting IR35.

After closing the curtain on another year, what can we learn from the turbulent times of 2016? We held our breath on more than one occasion as we waited to learn the outcome of Brexit, The Budget and vital law suits affecting IR35.

IR35 prescribes that where the contractor-client relationship is similar to that of a traditional employee, the relationship is deemed 'employed for tax purposes'. As an employer or agency, you may face HMRC fines and a significant increase in contractor fees as they in turn adjust to higher NI payments and potential back payments.

Uncertainty surrounding IR35 has plagued our industry all year, casting confusion over how to act now and in the future. But while we continue to wait for further Government guidance, we can take some learnings from 2016. Let's review.

1. Public Sector push confirmed
The Autumn Statement confirmed the Government will press ahead with changes to IR35 in the public sector. From April 2017, it is the responsibility of the public sector organisation to determine whether a role is 'in' or 'outside' of IR35. Public sector bodies need to prepare.

2. No sign of the tool
HMRC has talked of a tool that will help companies, agencies and contractors assess their IR35 status. The delivery date for the tool is April 2017. The industry waits...for the tool...the guidance... the appeals process...

3. Key legal cases pave the way
A contractor's IR35 status is determined by a 'picture' of how they operate day-to-day, the reality of which must be reflected by the contract.

For an entity such as the BBC, IR35 strikes a particularly difficult balance. Responsible for the tax payers' money, they also have a duty of care to all contractors who are now employees. How then, to support presenters investigated by HMRC over their IR35 status when contracting, while carefully allocating the license fee? Each individual is entitled to have their case decided on its own merit; an expensive route to court.

But two BBC newsreaders did take their IR35 case to court and it's fortuitous they did. The judge set out how IR35 status should be decided, setting a precedent for considering the individual facts regarding 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 the working relationship, rather than the assumptions. Good news for all future contractors who fall under the scrutiny of HMRC.

4. Errors are costly
The MOD's Hydrographic Office (UKHO) took fast action this year to mitigate the risk of IR35 and asked all contractors to become employees. Poorly articulated, they witnessed a mass walkout of contractors, putting several major IT projects at the MOD on hold.

5. Act now
In just four months, HMRC's public sector scrutiny will begin in earnest. As Kate Cottrell, an IR35 adviser, former HMRC employee and co-founder of Bauer and Cottrell commented in a Harvey Nash article earlier this year, "It is essential for all those affected to have an accurate understanding of the IR35 rules and to manage the impacts on their own businesses. The current lack of information available, as to how these new rules will work in practice, may make planning for them seem like an impossible task but everyone needs to do something now."

6. Consider a Contract Review Service
Bauer and Cottrell is creating a review service aimed at public sector clients to enable them to check their engagements with contractors. Currently, it offers this service to contractors which includes verbal advice and a free negotiation service to strengthen or amend a contract to ensure that it accurately reflects the true terms and conditions.

7. Initiate a Contractor Audit
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 and as part of our service we can help you assess whether a role falls 'inside' or 'outside' of IR35.

8. Communication is key
Should HMRC come calling, organisations will likely endure an inspection to ensure everyone is behaving as they're meant to. In such circumstances, morale can quickly deplete. Clear and effective communications are essential and should be planned ahead of either an HMRC inspection or an independent contractor audit.

9. Remain agile when recruiting
For organisations needing to scale at speed, IR35 can be a weight around your recruitment neck. Victoria Payne, Bid Director at Harvey Nash, is well-versed in the framework landscape and has been included in numerous public sector roundtables on the subject. In the shadow of IR35, Payne has noted the Digital Outcomes and Specialists framework is particularly pertinent. It enables organisations to take an agile approach to buying, designing and delivering digital outcomes by procuring the appropriate specialist resource to deliver agile software development. It supports the Government's digital by default strategy and cloud adoption commitment.

10. Harness external resource
Undertaking due diligence in regard to IR35 is a sizeable undertaking. The impact on a company's internal processes is easy to imagine. The audit may call for the employment status of every employee and contractor, requiring payroll records, expense claims, cashbooks and petty cashbooks, IR35 policy and practice, along with copies of all contracts. Resourcing and managing such an investigation is no mean feat.

In anticipation of such investigations, more and more companies are investing in voluntary audits to clearly identify the scale, cost and gaps in their contractor management processes. Our experience in conducting such investigations for clients of various sizes, illustrates the demands on time and talent resources. Harvey Nash typically provides a team and the project can take between 2 and 6 weeks depending on the scale. For a business to resource the project in a similar manner is often inconceivable.

Harvey Nash continues to monitor and assess the marketplace, providing best practice advice for all clients and associates. Should you have questions or concerns regarding your organisation and IR35, we welcome your call.