The private sector reform of the IR35 rules came into force in April 2021. This means your clients now have additional responsibilities, and the only viable solution is to assess the risks and adjust processes to comply with the new rules. We’d also strongly suggest engaging compliance experts to advise your clients and keep everyone on track. However, it’s possible some of your clients will favour a strategy that looks easier or cheaper. In this article we’re looking at five of the most common, and we’ll explain why they’re a bad idea.

Ignoring IR35

Your clients are now responsible for assessing the IR35 status of any contractors they engage. HMRC are specifically looking for non-compliance, and anyone making gross payments to contractors without evidence to support their decision will be at considerable risk. For the client themselves, and you as the fee payer, it’s important that IR35 status is assessed correctly and the necessary supporting evidence is available. No-one wants to be HMRC’s example of non-compliance.

Blanket “inside” decisions

If treating contractors as outside IR35 without assessing their status is such a terrible idea, why not assume they’re all inside IR35 – wouldn’t that be less risky?

We understand why you’d think so, and when the reform first came in we saw quite a few end clients adopting this strategy. It does have some serious problems, though, and many of those who initially opted for this route have now abandoned it in favour of individual assessments.

Firstly, the legislation calls for “reasonable care” in carrying out IR35 assessments. Making a blanket decision rather than assessing individual status doesn’t qualify, so you wouldn’t be complying with the rules.

In addition to this, inside decisions increase the cost of your contractors, because you have to pay employers NI on what you pay them. The additional work involved in “deemed employment” calculations of PAYE tax and NICs will also come at a cost, and you might end up paying higher rates to secure key skills, as contractors take home less of their rate.

Assessing IR35 correctly, and treating contractors as outside IR35 when they genuinely are, is much more cost effective, and much less risky, than making blanket “inside” decisions.

Refusing to engage with PSCs

If you insist that all your contractors are employed by umbrella companies, or pay them all through your own PAYE system, then IR35 doesn’t apply and you and your clients don’t have to worry about it. Again, this could seem like an ideal solution, and again this is an illusion.

You may not actually be assessing IR35, but you are in effect insisting that everyone gets paid as an employee. This increases the cost of your contractors in the same way that a blanket “inside” decision would; employer’s NI becomes due on all payments, and contractors take home less of their rate.

If you’re trying to engage high quality contractors who have a choice about which contracts they work on, refusing them the option of working through their limited company is one of the worst things you could do.

Relying on HMRC’s CEST tool

HMRC’s Check Employment Status for Tax tool allows you, at least in theory, to carry out an IR35 assessment by completing an online questionnaire. This would appear to negate the need to source specialist expertise, and relegate IR35 assessments to a simple data entry task.

Unfortunately, CEST has been criticised since its launch in 2017 for giving inaccurate results and for ignoring some case law in favour or HMRC’s own interpretation. For example, it ignores Mutuality of Obligation, (MOO) one of the key principles on which the courts make IR35 decisions, because HMRC believe MOO exists in every contract. For example, a CEST decision was found to be incorrect by a judge at an employment tribunal.

It can be worth completing a CEST assessment to find out what it says, but you can’t rely on the results, and you certainly still need specialist expertise to assess IR35 status correctly. 

Muddling through on your own

Your clients come to you because you can use your specialist expertise to source high quality contractors with the skills they need. They could, in theory, handle their own recruitment, but it isn’t cost effective to hire in-house recruitment experts, and getting it wrong could be harmful to their business.

This situation is very similar. You and your clients could, in theory, create your own response to the reform of IR35 without any help but that would either mean hiring your own experts, or accepting the risk that you might get it wrong.

Compliance IR35 experts like Orange Genie Compliance can help you assess your risks and put the necessary processes in place to comply with the legislation and protect your business. They can also help your clients in the same way, allowing them to form a measured response to the reform and avoid any disruption to their supply chain.

If you have questions about the private sector reform of IR35, or if we can help in any way, please contact our expert team on 01296 468483 or email info@orangegenie.com