IR35 private sector reforms: What firms need to do now the start date has passed

While many medium to large private sector firms have been rushing to meet the IR35 deadline, it’s important to remember that April 6 2021 is just the beginning of these changes coming into effect.

Not only do all medium to large businesses need to continue managing this new approach to contingent workforce management to stay compliant with HM Revenue & Customs (HMRC), it is likely many will now discover the initial compliance measures they put in place will need to be tweaked so they can accommodate “business-as-usual” working practices.

Since the IR35 reforms came into play on 6 April 2021, responsibility for making Status Determination Statements (SDSs) on whether the contractors a private sector firm hires are inside IR35 for tax purposes (subject to employment taxes) or outside IR35 (not subject to employment taxes) has fallen on the employer.

Thankfully for those working in IT, many tech companies and recruiters already have a more mature approach to the changes, having previously grappled with the reforms when they first came into effect in the public sector in 2017.

Research from Brookson Legal and Jobfeed shows that IR35 was already mentioned in almost a quarter (24%) of the sector’s job advertisements for contractor roles week commencing March 8 2021. This demonstrates a greater understanding of the importance of having clear policies in place to attract contractor talent. To put these figures into context, and by way of comparison, in other contract-reliant sectors – such as insurance and finance – only 6% of adverts mentioned IR35 on the same date.

That said, the sector has also been hit by knee-jerk blanket bans imposed by some major hirers on the use of contractors working via personal service companies. While it is easy to see the attraction in what appears to be a simple, risk-free solution, many of these businesses are likely to discover to their detriment that they have excluded themselves from up to 60-70% of the contractor talent pool that would otherwise fall outside of IR35 in a status determination.

The much maligned Check Employment Status for Tax (CEST) tool provided by HMRC allows organisations to determine their contractors’ employment status for tax contributions. The breakdown from the tool has shown that only 30% of these determinations to date have been inside IR35, with a further 70% being either outside IR35 (50%) or undetermined (20%).

Our own determinations made for our clients across multiple sectors point towards around two-thirds of contracts being outside of IR35 as well.

This clearly highlights the risk businesses take when imposing a blanket ban. Missing out on access to this talent could become costly as the economy begins to scale up again in the wake of the Covid-19 coronavirus lockdowns lifting.

Furthermore, blanket bans might even be considered by HMRC as a failure to demonstrate the “reasonable care” required by the legislation for each status determination. If that is the case, hiring companies may be asked to review their policies at a later date.

Amending the approach an organisation takes towards hiring contractors can only end up being beneficial in the long run. Ensuring the correct IR35 compliance measures are in place now will not only provide peace of mind regarding HMRC fines, but will mean that the best talent can be hired for the job, which is something that could prove critical as we begin to exit the pandemic.

For organisations still grappling with IR35 compliance, there is no need to panic. By starting now and seeking expert help, such organisations will have enough time to implement the most appropriate solution and avoid any commercial impact as well as minimising tax risk.

Maintaining a good level of visibility throughout the temporary workforce and the supply chain will be vital to a business in avoiding any surprise tax bills or HMRC fines, and should be another approach that gets embedded as business-as-usual to contingent workforce management.

Now that the pressure of the initial deadline for compliance has passed, it is strongly advised that organisations take the time to carefully evaluate their approach to contingent workforce management.

No matter how prepared the business may be, as good practice in this area evolves there will be some aspects of the approach which can be improved. Those that seek expert advice to refine these policies and processes will find themselves with access to the best contractor talent in the years to come.