Ready for IR35 in three months’ time? Nor is almost anyone else, it seems. But is it now too late to do anything about it, or can you still take meaningful steps, even at this advanced stage, to protect your IR35 position?
There is good news and bad on this. The bad news is the Government’s newly-announced review of how IR35 will operate in the private sector. The very most that we might expect out of this is some mildly tweaked guidance. Bear in mind that the review will last scarcely a month and that it will conclude only weeks before the 6 April implementation date. Consider also that it will reportedly include consultation with representative stakeholders plus a fresh look at the HMRC’s online CEST tool and analysis of how the same reform went down in the public sector in 2017. All immensely sensible in principle, obviously, but equally all things which could and should have been done at least a year ago if the Government were genuinely interested in the outcome. Coupled with confirmation that neither the principles behind this reform nor its timing are up for discussion, you are left with the inescapable conclusion that the review is to tick a box on an election promise and will actually lead to little or no meaningful change.
So back to our other question and the good news – what you can still do to mitigate your IR35 risk:
- A fairly blunt-edged triage exercise to start with. Without going into the nuts and bolts of individual PSC contract terms, form a view on each (or each category of) PSC contract. Is that individual contractor clearly doing an employee-type role, i.e. something integral to your business or which is also being done by others who are already on your Schedule E payroll? The Nos are probably safe, the Yesses are for the time being irretrievable and so focus only on the Maybes.
- Tell the Yesses either direct or via any intervening agency that from April you will be deducting tax on their invoices. If the position is so clear, then they will or should have seen this coming, but doing it now gives the PSC at least a brief opportunity to show you that you are wrong about it.
- Looking at the written contracts of the Maybes, decide what scope exists to remove employee-type wording around quality control, supervision, obligation of personal service by the contractor, incorporation of employee policies, prescriptive wording as to the how rather than when or what of the contractor’s tasks, payments on a flat rate rather than on project milestones, etc. Could you make these changes without damaging the practical operation of the contract or making the written contract misleading of the reality? If you can, terminate the current PSC contract and offer another with those alterations made. Don’t worry too much about any period of notice provided for in the PSC contract (unless you have important restrictive covenants in it, which you shouldn’t) – the key for both parties is to get the new contract in place by the start of April.
- Look also at how the Maybes have been managed in practice – if they are treated like employees, have job titles or business cards, appear on your organisation charts and are invited to staff parties, etc., then you can simply stop those practices with immediate effect. Withdraw the cards, revise the org chart so far as you can do so truthfully, start writing to the PSC rather than the individual contractor and so on. You need contract management practices as at the start of April to be consistent with a genuine arm’s length B2B arrangement. These are not steps which you should take without telling the contractor, but they do not require any minimum or contractual period of advance notice and so could be effected prior to then relatively easily.
- After this exercise, revisit your Maybes. Where you cannot make these changes, probably best move them to the irretrievables pile. If you can, then make them and put the result through the CEST tool. If you get an outside-IR35 answer, job done. If you don’t but disagree, consider a brief note for the file of why you still think that this contractor or group of contractors falls outside IR35.
- Ensure that your Accounts Payable and Payroll teams are working together such that the right contractor invoices are taxed and the right tax is deducted and accounted for. Once the conceptual and systemic hurdles of paying VAT and deducting tax on the same invoice are overcome, much of the intrinsic weirdness of this will recede and your scope for inadvertent errors will be much reduced.
- Don’t panic. If you are not ready then you are very far from alone, and your time for fixing this does not end on 6 April. Do what you can before then, take advice on any tricky cases and don’t be bullied into increasing contractor rates to compensate in the meantime.