The key lessons to learn from IR35

It’s been five months since the introduction of the UK Government’s IR35 tax – and already it’s clear that businesses have several lessons to learn in order to mitigate the impact of its disruption on their functions and profits. Kris Simpson is the Head of UK B2C for Cool Company and is responsible for operational and compliance in the UK, with over 10 year’s experience in Umbrella Payroll and the Recruitment sector. He shares his thoughts with Business Leader.

Businesses had been given a whole 12 months extra to prepare, but with the world having moved into remote working due to Covid and Brexit in full swing – there were many unforeseen factors when it came to businesses preparation for IR35. Most large businesses prepared properly, but many medium-sized businesses didn’t and are still trying to come to grips with the new rules.

Over the last 4 weeks, HMRC has publicly fined government departments for the failure to manage IR35 properly and this has caused many businesses to review their current structure or even refuse to work with limited company contractors to avoid the risk entirely.

Talent is suffering

IR35’s effect has been felt across all industries, most keenly in regards to the severe talent shortages being suffered by the UK at the moment.

The UK already had major skills shortages in key areas like IT, technology and construction – and the impacts of these shortages have only been further exacerbated by the paralysing shortages now affecting the logistics sector.

The simple fact is: the available talentpool has shrunk. There are a number of reasons for this, but in the last five years alone Brexit, education and training gaps and reduction in skilled workers travelling to the UK have all added to the problem. That’s without even mentioning the COVID-19 pandemic, which has also added to an ever-growing list of factors that have been costly to talent. Contractors and freelancers in particular were hit hard by national lockdowns and a lack of financial support throughout the height of the pandemic.

The introduction of IR35 could not have come at a worse time and has only exacerbated the issue. Now, workers are refusing assignments that are deemed to be inside IR35 in favour of working for small clients who are exempt from the new rules or businesses who will offer a higher rate to compensate for being inside IR35 legislation.

It’s clear that the flexibility of contract work has been massively impacted by IR35, with contractors moving between jobs far less often than they might have done previously. The result of this is that contractors must command higher rates of pay to combat the drop in net earnings, while companies are left with an even further reduced talent pool to select from.

This ultimately leaves companies with difficult decisions to make when it comes to balancing the books. Do they either increase the pay rate, ignore the legislation and hope for the best or seek a permanent member of staff to complete the work? All of this brings about delays – which are unacceptable in such a competitive consumer marketplace – and then in turn a drop in profits that only makes that decision over where to spend even harder.

For businesses, it’s a vicious cycle bringing with seemingly no end in sight.

Mitigating the risk

When it comes to mitigating the impact of IR35, it’s made worse by there being no quick and simple solution to the problems that businesses face. Official advice states that businesses should use the HMRC CEST tool – but it is not quite that clear-cut. Those recent fines and penalties within the public sector have shone a light on the failings of the CEST tool and many of those in the market no longer feel safe to use it and protect their business.

Of course, there are other solutions available for businesses – but all of them come at a risk to the business too. Balancing the risk versus reward of alternative solutions can be tricky. None of these methods have been officially tested against the new rules, so businesses should choose an alternative solution at their own risk. After choosing one solution, sticking to it is the best course of action.

The best way to manage IR35 is to create a process that you then never deviate from, but continually review and test – as well as implement comprehensive staff training, ensuring that accounting teams are fully aware of the intricacies and small print of IR35 rules. The importance of consistency cannot be overstated, because ensuring that each assessment is undertaken in exactly the same way every single time will help prove that the business followed a set process and showed no prejudice towards contractors who tried to change the decision.

Lessons to be learned

Ultimately, reading up on and understanding the key elements that HMRC test IR35 on is key.  Given some of those fines in the public sector have been in the multi-million pound region, paying for legal advice could be far more cost-effective compared to the possible fines if you get it wrong.

Businesses need to look at the solutions, explore what they provide and ask exactly how they protect business interests. It doesn’t really matter which tool or solution businesses choose to manage IR35, as ultimately the risk is the clients. Contractors could use PAYE umbrella enterprise solutions, like Cool Company, that can pay salaries and raise timesheets on their behalf and streamline the invoicing process. Cool Company also has the added benefit of allowing businesses to benefit from access to niche talent without the need to take on new hires, or handle the admin associated with freelance recruitment.

Businesses should choose the solution that best fits the company’s risk profile and can provide the most robust assessment process.

The key takeaway from the implementation is HMRC are coming, and they are using IR35 to do it, many businesses assumed this was a change but like previous changes, nothing would come from it. But HMRC has shown their cards and the market is now aware that they are serious about stopping tax avoidance in the contractor workforce.