At the end of last year, HMRC released its report on the short-term effects of the 2021 off-payroll working rules, also known as IR35. The rules were changed in 2017 for public sector organisations and 2021 for private sector businesses, shifting responsibility for determining a contractor’s employment status to the hiring organisation rather than the individual.
After digesting HMRC’s reports, it’s clear to see we aren’t getting the full picture. The changes to the legislation have been far from easy for hirers, agencies or contractors.
Concerns with Compliance
The report, carried out by IFS Research, states that majority of businesses found the reforms easy to comply with; only 24% found it difficult. The question is: How many are doing it right?
A key concern to highlight is that a third of businesses working with a flexible workforce and commissioning contractors have spent very little or nothing on ongoing costs to comply with the rules.
Although only around 10% of end clients represent around a half of the total “compliance spend,” there seems to be no analysis in the report around compliance levels across businesses. This feels like a major oversight.
Non-compliance is common within most markets, causing problems for agencies, workers and clients alike.
Failing to Look After Flexible Talent
Furthermore, over half of organizations said that all of their contractors fell entirely outside or inside the rules, but in our extensive experience of expert reviews, this is very rarely the case.
This suggests that a significant number of the 130,000 individuals who have been moved to payroll as a result of the reforms have had their contracts incorrectly categorized as inside IR35. They may now behaving unnecessary employment taxes deducted from their pay.
HMRC seems keen to highlight that this population of 130,000 individuals represents just 2.5% of the total self-employed workforce and less than 1% of the total workforce. Is this an indication that the government is content with the unfairness of this outcome?
The most skilled and experienced contractors will actively seek work outside of IR35 through a limited company which offers better take-home pay and more autonomy. In a highly competitive hiring environment, businesses and agencies that can offer these roles in confidence will be able to continue to secure the talent they need.
Sleep-Walking into Issues
The major concern is that hiring businesses and their supply chains could be sleep-walking into tax compliance issues, as HMRC now actively pursues enforcement activity.
For example, solely relying on umbrella companies to manage the IR35 rules can leave your business at risk. If managed incorrectly, HMRC may deem either the recruitment agency or client to be ultimately responsible for repayment of unpaid tax and associated fines, but it could take years before any non-compliance is discovered. If you do choose to use an umbrella company, make sure you have adequately vetted them to avoid inadvertently introducing additional tax risks into your supply chain.
False Sense of Security
This risk is compounded by a false sense of confidence in automated tools such as the government’s Check Employment Status for Tax (CEST). According to this research, many organizations have relied solely on the CEST tool, despite there being a huge discrepancy between the number of roles determined to be outside IR35 by the tool and the number of jobs actually being advertised as outside.
CEST has repeatedly demonstrated not to deliver sufficient “reasonable care” in a series of high-profile public sector tax repayments made this year, resulting in significant hidden tax liabilities.
Time to Take Control
HMRC have failed to take any ownership of the ongoing issues in the IR35 framework, nor give the full picture on the matter. Anyone working with contractors on a daily basis can to see that.
It’s left to the recruitment industry to read in between the lines of the report. To maintain the flexible workforce, supply chain models and compliance solutions need to be regularly monitored and evaluated — with expert support. In this way, IR35 can be navigated as a force for good, despite the problems that the HMRC still refuses to acknowledge.