There have been a number of changes as a result of the pandemic that have impacted employment and the way businesses manage their teams. While the furlough scheme has now been extended, giving businesses additional support for the coming months, new regulations including IR35 create responsibilities that employers need to uphold when undertaking a determination about applying individuals to payroll.
Also known as the off-payroll working legislation, there are many questions around what IR35 is, how to prepare, and what employment after the deadline will look like. It is often seen as a change that will only impact payroll management, however that is only the endpoint, and the legislation has impacts across HR and People management.
While the April 6 deadline looms ever larger, it’s not too late to ensure your teams are aware of the ins and outs of the regulation and how to prepare for it.
Back to the basics – What is IR35?
Essentially IR35 is a tax anti-avoidance legislation designed to be able to pinpoint ‘disguised employees’, such as contractors who work at a company in the same manner as full-time employees.
Prior to the changes, these off-payroll contractors were afforded tax and National Insurance exemptions. However, following IR35’s implementation, medium/large-sized private businesses will be required to ensure that all taxes are fully paid by all staff – including contractors. Once the decision has been made, employers will need to pay contractors appropriately. This means deducting employee tax and National Insurance contributions (NICs) at source, via PAYE, including the employer NICs and the Apprenticeship Levy as with any other employee.
As a result, some businesses will find themselves with a significant additional administrative burden in order to comply with IR35, not to mention a financial burden when contractors have to be transferred to their payroll and employer NICs are added to the cost of hiring.
February 2021 saw HMRC announce that there will be a 12-month grace period, meaning that businesses will not face any penalties due to inaccuracies, regardless of when the inaccuracies are spotted. However, this does not apply if there is evidence of deliberate non-compliance.
Following the 12-month period, if the business incorrectly discloses information, or if there is obvious defiance, they can find themselves subject to back logs of tax and National Insurance payments that are requested by HMRC or consequential penalties.
Managing the workforce ahead of IR35
Despite being in the works for a number of years now, some businesses may find themselves unprepared and ill-equipped to aid employees when it comes to preparing for the changes. But it isn’t too late, especially given the 12-month grace period to come.
Following these steps can get you on the right track, or reaffirm preparatory HR processes that have been put in place already:
1. Consider what the changes mean for your overall business – Having a clear understanding of what the new regulation means for both contractors and your business is imperative. As part of the HR department, building your knowledge on the intricacies of IR35 is the first step to managing to workforce and the impacts on the wider business.
Once you have all of the facts, you can them be a supportive point of contact for contractors and a source of information for leaders across your business.
2. Evaluate whether you have complaint systems in place – Addressing IR35 shouldn’t only be seen as a single task of compliance, as it can act as a trigger to reimagine your workforce procurement management systems.
Evaluating your systems will require you to make sure you have admin resources that can check contracts, carry out the status determinations for contractors and freelancers, adjust payroll IT systems and reconsider the recruitment process for contractors.
Doing this will start to reshape the business in an efficient way that keeps compliance at the forefront.
3. Rethink the contractor hiring process – This is the time for you to take a look at how hiring contractors can be done better or more efficiently. To do this you will need to speak to the various third-party agencies you work with and see how the process can be streamlined to benefit the business and new hires.
But prior to this, you will also need to consider whether hiring contactors will remain a cost-effective staffing solution, or whether the business would be better off taking on contractors full-time. If the latter path is taken, the business could run the risk of repelling highly skilled contractors that could choose to look elsewhere in order to reap the benefits that come with contracting.
4. Stay up to date with developments – As with any new regulation, getting used to the changes can take some time, let alone having to adapt to unexpected updates. Keeping up to date via HMRC and syncing with professional governing bodies will allow you to avoid surprises and make sure you haven’t missed any legislative requirements.
To ensure that you have the ability to adapt to any changes, a tip would be to set aside an additional ‘contingencies’ budget, that can allow you to respond to any unanticipated HRMC PAYE requests.
April 6 is just around the corner, but there is still time to get ready for the introduction of IR35. Having a clear understanding of the requirements, evaluating what this means for the business, assessing current and future processes, and planning for the future will place HR teams in a strong position to adapt to the coming change. As the saying goes, it’s better late than never.
Simon Parsons is Director of UK Compliance Strategies at SD Worx UK.
He is a specialist in UK tax and social insurance legislation and all things regarding payroll software development. Simon is also a member of a number of payroll-related government consultation groups and panels, advising on the development and application of UK government policy impacting payroll.
