Matt Fryer, Head of Legal Services at Brookson Legal
While there was a lot of attention being paid to the IR35 implementation date on April 6th, it is vital that finance businesses working with contractors and freelancers understand this is just the start of the journey.
With all medium and large financial service organisations affected by the new legislation, hirers now need to embed a completely new approach to contingent workforce management throughout their operations and their resource supply chains.
The end-hirer is now responsible for producing the Status Determination Statements (SDSs) of its contractors. This will decide whether the hiring business (or agency if one is in use) will deduct and pay over to HMRC the employment taxes (NI and income tax) for the contractor classed as inside IR35.
Managing this process properly is crucial to ensuring compliance with HMRC, as well as to attracting talented and experienced contractors in an increasingly competitive market.
Blanket bans and shortcuts
Prior to the deadline, many organisations will have taken short cuts to putting an IR35 solution in place. These solutions will not work as a viable long-term approach to compliance. Some could also create severe limitations on potential for business growth in the years to come.
A clear example of this is a blanket ban on the use of contractors. While blanket bans can seem appealing to organisations as a straight-forward, risk-free option, businesses using them will quickly discover that they will be missing out on the contractor talent pool that is working outside the IR35 regulations. Often highly skilled specialists or professionals, they are unlikely to be willing to take a pay cut to do the same work inside IR35.
In fact, data from HMRC’s CEST (Check Employment Status for Tax) tool indicates that only 30% of contractors whose status has been determined to date have been found to be inside IR35, with the remaining 70% made up of outside IR35 determinations (50%) or an undetermined statement (20%). Status determinations made by Brookson Legal mirror those of HMRC, with approximately 70% of contracts showing to be outside of IR35.
A further example of a short cut which appears to have been used by many large financial services businesses is attempting to shift the risk and responsibility by “outsourcing” certain services traditionally provided by contractors. This is a high-risk strategy, as getting the outsourcing arrangements wrong or relabelling the provision of labour as an outsourced service is unlikely to shift the risk and responsibilities away from the end user of the contract labour.
IR35 and attracting talent
As we begin our journey out of lockdown and the economy begins to recover, it is important that finance businesses don’t limit the talent they can recruit through the use of a blanket approach or a hastily implemented IR35 solution.
Using data from Jobfeed, Brookson Legal research found that only 6% of contractor job advertisements in the insurance and finance sector mentioned IR35 in the w/c March 8th, 2021. In comparison, the IT sector mentioned IR35 in adverts for 24% of contractor roles on the same date. This indicates that the financial services sector has not responded as proactively to the IR35 changes as other sectors have and could therefore be losing out on the top contractor talent to other organisations who have taken the time to understand the legislation and ensure that it is correctly applied.
Business as usual
For financial service organisations that have taken appropriate steps already, now is the time to carefully evaluate their contingent workforce management for business as usual going forwards. This work ranges from processes for recruitment and contract management to checking that you have the right systems in place for the correct payment of wages and tax. It is also essential to ensure that you have visibility of this compliance throughout your resource supply chain. If you do not know how IR35 is being managed by your suppliers, you need to ask them. At the end of the day, it is the end hirer that HMRC will hold accountable for recovery of tax and even fines.
Although the IR35 implementation deadline has passed, taking the time to evaluate your solution now will help ensure compliance, mitigate risk and prevent surprise fines and tax bills from HMRC in the future.
