AAB tax expert on how IR35 changes are impacting businesses
Reminder of the changes The UK Government argued that non-compliance by personal service companies (PSC) pre-April 2021 under IR35 would cost the economy£1.2 billion each year by 2022.This resulted in changes to the legislation to bring in three key measures:- Moving the responsibility for completing IR35 assessments from the PSC to the end-user of the PSC’s services.- Moving the PAYE administration burden up the chain from the PSC to the fee-payer.- Introducing requirements for communication throughout the chain, and a dispute process should the status determined by the end-user not be agreed with.These changes were expected to bring a shift from outside to inside IR35 status, seeing an increase in the number of PSC’s being treated as employees for tax and National Insurance purposes via PAYE rather than through self-assessment.Impact on businesses and contractors As businesses have continued to battle the impact of Covid-19 and the ongoing changes to restrictions, these reforms to IR35 have brought further administration and costs to businesses in ensuring compliance.Despite this, and the initial impact to long-standing contractors caught by the rules, my firm, AAB, has seen businesses continue on with resilience, not allowing the changes to affect the delivery of key projects by ensuring that contractors are engaged as true off payroll workers as far as possible.On the other hand, it goes without saying that many businesses have taken more caution than may have been necessary due to the risk they are taking onboard when engaging contractors they deem outside IR35.This has therefore impacted the number of opportunities available to contractors and has seen many that operate as genuine contractors suffer a significant impact on their take home pay, where they have been unable to secure outside IR35 work.HMRC compliance reviews It was broadly known that HMRC did not have much of a task force in place to deal with employment status related matters, nor had it had much success in disputing status applications.However, in recent months, when less focus has been needed for Covid- related support, HMRC has ramped up its employment status team and has launched compliance checks into oil and gas-based private sector firms.These checks have primarily focused on the application of the legislation and procedures businesses have implemented to adapt, but can extend to individual status determinations if HMRC identifies any gaps which could have resulted in non-compliance for tax and National Insurance purposes.It is a fact that employment status is notoriously difficult to argue with; the status itself being based solely on opinion, unless otherwise ruled by the courts.This means that any check launched by HMRC could span months – or even years – and so it is vital that the right people deal with any HMRC enquiries into the application of these rules.This could see a requirement to bring in external professionals in the subject area who can rely on both the legislation and case law to try and secure the best position for the company.This comes following the catastrophic liabilities and penalties charged to HMRC’s own departments due to non-compliance with the public sector reform from 2017, and so we would expect similar liabilities to be faced by private sector businesses.This reinforces the importance of businesses to have a robust process in place for managing contractors, and to apply the IR35 legislation on an ongoing basis to prevent any cracks which may allow failures to slip through. Failures which could potentially cost the business a sizable sum later down the line.Megan McDonald is an employment taxes manager and IR35 specialist at Anderson Anderson & Brown (AAB)