Ahead of the changes to the IR35 legislation for the private sector in the UK this April, we teamed up with Paul Lloyd at Brookson Legal in our recent webinar, which you can watch below. In ‘3 Considerations for Supply Chain Compliance Pre-IR35’, I spoke to Paul about these key areas of managing contingent workforce compliance before and after the IR35 implementation:
- Identifying contingent workers
- Completing IR35 assessments
- Ensuring compliance when these contractors are inside IR35
- Approaching recruitment after the April 6th implementation
- Making IR35 part of business as usual
You can watch the webinar here, or keep scrolling to read the blog. The IR35-specific content begins at [09:55] on the video below.
One of the most useful parts of our conversation revolved around the requirements and testing for IR35. While HMRC has its own tool, CEST, there have been some concerns around its accuracy. So I wanted to take a deeper look into the testing process, what’s required, and what this means for affected organisations.
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The 3 Main Tests for IR35
Following the new IR35 processes will require organisations to complete and submit a Status Determination Statement (SDS) for each member of its contingent workforce. The SDS includes justification for the decision made.
When completing an assessment (before completing the SDS), it’s important to keep three key things in mind:
- Personal Service
- Mutuality of Obligation
In this sense, control refers specifically to how much control the end-hirer has over the worker. Do they dictate the equipment they use? Where they work and what their hours are? If so, this worker is looking more and more like a disguised employee.
Is the contractor obligated to personally carry out the work themselves? If so, it indicates that the contract may be inside IR35. Or would you accept a replacement? In relation to IR35, the right to substitute is the right (of the Personal Service Company – or PSC) to send a replacement to perform services under the contract and is a very important factor in the status determination. For the contract to fall outside IR35, it should include a genuine right of substitution.
Mutuality of Obligation
This is another key test, essentially looking at whether this is an employer/employee relationship or more of a business-to-business relationship. For example, are your contractors on six-month assignments that you continue to extend without new contracts or new assignments processed?
It’s vital to ensure you have clear and visible processes in place to manage this, both to manage cost and maintain compliance. The main focus here is that if there are any major changes to the assignment or the contract next time you renew with this contingent worker, you will need to submit a new IR35 assessment.
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Other Factors to Consider
While these are the three key criteria to keep in mind when assessing for IR35, you will also need to consider if there is evidence of financial risk on the part of the contractor to complete the work and if the contractor has access to workplace perks such as bonuses or parties. All of these factors will help you to understand whether or not your contractor(s) is currently functioning as a disguised employee and would need to fall within IR35.
Status Determination Statement (SDS)
All of the factors above will need to be considered before completing an SDS for each contractor. As of 6 April 2021, the obligations and risk to provide the summary now sit with the hirer. The SDS must:
- Advise on employment status for tax
- Detail reasons to how this decision was made
- Be communicated to both the worker and any intermediaries in the supply chain
- Be prepared with ‘Reasonable Care’
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What Is ‘Reasonable Care’?
‘Reasonable Care’ was a term introduced into the IR35 legislation for the 2017 public sector reforms. Although not clarified at the time, we now understand that reasonable care requires hirers to take certain necessary steps when auditing their contingent workforce. This auditing is the main way we expect HMRC to police the upcoming changes for the private sector in the UK.
To be considered to have taken reasonable care, businesses must demonstrate that they have taken active steps to prepare for and comply with the new legislation. This will mean that a consistent, auditable process is in place but might also include seeking the advice of a qualified, professional advisory.
However, there are also ways that will show HMRC that reasonable care has not been taken and this could cause some significant problems. These include inputting inaccurate information into CEST (HMRC’s IR35 tool) or subcontracting out the SDS process to another party without confirming the accuracy of the conclusion or reasons for it.
Reasonable care is likely to be the most closely monitored of the new requirements, so it’s important to take the time to get it right.