Many parties who hire contractors do not understand how IR35 & Off-Payroll Working affects them. Complexity of the legislation can cause businesses to put themselves at unnecessary risk.
To avoid tax liabilities and ensure compliance with tax regulations, HR professionals need a robust IR35 process.
Should you consider working off-payroll?
The Intermediaries Legislation (also known as “IR35”) was introduced in 2000 to combat tax avoidance. This is where a worker provides services through an intermediary, usually a limited liability company, but the relationship would be employment if the worker engaged the firm directly. Contractors are responsible for assessing and paying tax if IR35 applies.
In 2017, after the original legislation was largely unsuccessful, a new law called “Off-Payroll” which covered public sector organisations was introduced. In 2021, the government extended it to large and medium-sized firms in private sector. With the off-payroll regulations, the responsibility for assessing engagements as well as taxes was transferred from contractors to firms. Small companies in the private sectors still follow the original IR35 regulations, where the contractor is responsible for determining the employee status.
While the new legislation refers to off-payroll work (“OPW”) the term “IR35”, which is confusingly used for both sets of laws, is still widely used.
If your organization is large or medium-sized and you engage individuals to provide services via an intermediary, then you need to implement compliance processes.
How to do it in 6 easy steps
Step 1: Educate yourself and key stakeholders
You can also find useful articles and webinars from firms that specialise in IR35/off-payroll matters. Find useful articles and webinars by firms that specialise in IR35/off payroll matters.
Organise training sessions to educate your HR team, your finance department, your senior management, and your hiring managers about how IR35 can affect your business.
Collect relevant materials based on statutes and case law. Create a centrally accessible folder to make it easy for you and your team to access important documents.
Step 2: Audit your workforce
Identify all freelancers and contractors within your organization. List all “contingent workers” in your organisation, including those who are paid by third parties. Check the accounts payable of any contractors who are not tracked by payroll systems.
Review current contractual agreements and working practices (including those involving third parties). Ensure clauses within your contracts address IR35-related issues, such as control and mutuality. It is highly recommended that you hire an IR35 expert to review your contractor agreements, as many generalists are unaware of the potential pitfalls.
Verify that the work performed by contractors and independent workers matches the terms of the contract.
Step 3. Develop an assessment process
Use a reliable tool to determine the IR35 status for your employees, contractors and free-lancers.
Document the rationale and contractual evidence for each assessment, review it regularly and reassess them when contracts or working conditions change. Document the rationale and evidence of each assessment, review it regularly and reassess when contracts or conditions change.
Include in this process measures for dispute resolution. Outline the steps contractors can take to voice concerns, and the timelines for resolving them. If your assessment system does not handle disputes, you should assign someone or a team to manage and handle them.
Step 4: Update Policies and Procedures
Re-evaluate your recruitment process to take into account IR35. Include a clear indication of the IR35 status for your job ads to help contractors and freelancers understand what they can expect. Incorporate an IR35 evaluation into your recruitment process so that you can understand the likely status of contracts before signing them. Your hiring managers should be trained to identify potential IR35 compliance issues.
Create new procedures for engaging contractors so that you are aware of their IR35 status. Create an onboarding check list that includes IR35 assessments and contract reviews as well as documentation. Ensure that HR or legal teams are reviewing all new contracts to ensure IR35 compliance. This includes third-party engagements. Keep detailed records on contractor payments and deliverables to ensure they are in compliance with IR35.
Create guidelines to ensure that workers are continually monitored and their status is reassessed. Regularly review the IR35 status to make sure that conditions or scope of work haven’t changed. If they have, then you need to reassess their status. Document any changes to contracts or business practices that may affect the status. Assign responsibility to the monitoring and reassessment of processes in order to maintain consistency.
Step 5: Establish ongoing compliance measures
Regularly audit contractor engagements and keep an eye out for any changes in the rules. Review contractor engagements regularly to identify contract changes and conditions of work that could affect IR35 status. Some compliance tools automate audits to flag issues. Keep detailed records and involve the HR, legal and financial teams to ensure that necessary actions are taken before the next review.
Annual IR35 training is essential for all employees. Create a training program for all relevant staff including HR, Finance, Legal and Hiring Managers. Maintain records of training sessions and ensure that they are updated regularly.
Step 6: Prepare yourself for future HMRC compliance audits
Audit your compliance process independently every year. Your auditor and team can provide feedback to help you identify areas of improvement.
If you don’t have the expertise or resources in-house to conduct a lengthy HMRC compliance check, consider implementing specific tax defense investigation policies.
Ongoing Process
Work practices must reflect the contract. It is important to regularly monitor the status of contractors. This is not an easy task that can be completed in a single day.
