Now that IR35 enforcement is active in the private sector, businesses should be taking time to review their flexible workforce engagements and ensuring that ongoing staff training is in place, with a focus on what their responsibilities are under the legislation, argues Matt Fryer.
Both have been highlighted by HMRC as crucial parts of the ongoing ‘reasonable care’ responsibility.
We are now seeing an increase in requests for ‘mock investigations’ and supply chain audits, as hirers begin to stress test their solutions, highlighting the desire to be confident in their processes and compliant in the event of an HMRC investigation.
Mock audits allow businesses to see potential pitfalls and pain points in their IR35 solutions, before HMRC carries out its own investigations. However, we are finding several common challenges and mistakes during these stress tests.
Here are the five most common issues and how to address them:
Having the wrong person named as lead contact for the audit
If organisations identify the wrong person to complete the IR35 audit, or even the original contractor tax status determinations, they are unlikely to be able to provide accurate working practice information, which will lead to contradictions later down the line. We are seeing many audits being completed by employees in a central HR function role, or even outside the business, who have never even met the person they are carrying out the assessment for. When it comes to making a tax status determination, the person providing the evidence to inform the assessment should be someone who works closely with the contractor and is aware of their contractual requirements. This will ensure that all information provided is correct and a reliable result will be given. The same person should also be involved in any audits relating to this contract.
Not understanding the questions
Carrying out a mock audit isn’t as simple as ticking a box or answering yes or no. Conducting status assessments and audits is a complex task, so don’t be afraid to ask for help if you are struggling to understand the questions. In recent mock audits we have found individuals reluctant to ask for support, which results in the assessor answering the questions in a way they think they should be answered, rather than giving accurate information. This can lead to discrepancies later, which will cause delays and the possibility of further investigations. The best way to overcome this issue is to ensure the relevant people have further training on IR35. There is no need to guess, ask an expert before completing anything you are not sure on.
Lack of policies and procedures
Having policies and procedures in place will ensure managers are practically trained on their understanding of IR35. Line managers have the direct relationship with the contractor and will know the details about how that contractor is engaged and what tasks they undertake; all vital information needed to carry out a status determination assessment. By training the managers, you will be able to identify where the risks lie. These policies and procedures will also help show your business’ approach to IR35 and enable a consistent approach across the business.
Blanket decisions and role-based assessments
Blanket decisions, which are applied to whole worker populations do not meet HMRC’s reasonable care requirements. To carry out a proper assessment that follows reasonable care, each status determination must be done on an individual contract basis, personalising the status to individual circumstances where possible.
The major problem with IR35 blanket decisions is that the one size fits all approach only works if everyone is the same size, which isn’t always the case when engaging with contractors. A common error we see is businesses making one determination for a role and subsequently applying that it to all, or what are perceived to be similar, engagements without ever revisiting the assessment and/or sense checking that it is applicable for the other engagements. There are many factors that need to be considered, for example roles managed by different line managers or at different sites might be assessed completely differently. If there are several projects going on at once, each project might require different contracts or working practices.
Some businesses may have a blanket decision to not use contractors operating via a PSC, to avoid having to carry out status determinations. Whilst this may seem an easy option, this could mean businesses may struggle to find the resources they need, which could lead to failure to deliver projects on time or on budget. Blanket decisions can have a negative impact on both contractors and the hirer; if contractors are not happy with the decision, they’re likely to look elsewhere for an outside IR35 role, which could mean a loss of talent and specialised skills.
Struggle to evidence approach
Contractor status requires ongoing monitoring, so it is essential to gather evidence on status throughout a contractor’s engagement, particularly if there are any changes to the contract or working practices. By having ongoing evidence, this could help businesses later down the line, should HMRC make a challenge to a status determination.
We recommend compiling an evidence pack comprising the business’ general approach to IR35 compliance; each individual assessment and regular re-assessments; plus any other supporting evidence to document compliance such as records of training and IR35 specific policies and procedures. These can be submitted to HMRC to demonstrate how you have overcome your “reasonable care” threshold and avoid getting embroiled in an in-depth investigation.
By avoiding these mistakes now, businesses can be fully prepared as HMRC transitions into enforcement mode. Now is the time to act and review your IR35 approach, but do not be afraid to ask for help where needed. By engaging with an independent expert to carry out a mock audit, your organisation can identify any issues so they can be resolved, leaving you confident in your IR35 solution.
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Matt Fryer is Head of Legal Services at Brookson Legal
Amelia Brand is the Editor for HRreview, and host of the HR in Review podcast series. With a Master’s degree in Legal and Political Theory, her particular interests within HR include employment law, DE&I, and wellbeing within the workplace. Prior to working with HRreview, Amelia was Sub-Editor of a magazine, and Editor of the Environmental Justice Project at University College London, writing and overseeing articles into UCL’s weekly newsletter. Her previous academic work has focused on philosophy, politics and law, with a special focus on how artificial intelligence will feature in the future.
