If you haven’t yet heard of IR35, the controversial tax rule, it’s time to start learning.
The rule, designed to limit tax avoidance through “disguised employment”, already means that off-payroll workers who would otherwise be deemed directly employed are taxed at the same rate as employees.
But from April the law changes: it will be down to companies who employ contractors to assess their status, rather than the workers themselves. And those companies may be liable if they get it wrong.
The changes have prompted widespread dismay. Around 60,000 organisations in the UK use up to 200,000 off-payroll workers — freelancers, contractors or consultants. Under the new rules, these companies must, in theory, determine the status of every single worker, case by case.
Making those determinations is a massively expensive exercise in itself, but it’s not the only cost. HR teams will need to be trained on the new processes for future hiring. Finance departments will have to get their heads around them for payroll and tax accounting.
Companies are between a rock and a hard place. Many may consider simply converting such workers into employees on their payroll. But not all freelancers will appreciate the change in status — not if it leads to reduced net earnings as tax and national insurance contributions (NICs) are deducted at source. Employers could find themselves losing disgruntled workers, and struggle to attract other high-quality labour under the new terms.
And even if workers are happy, it seems inevitable that contracts will need updating. Now that they are official employees, they may want compensation if their company offers no holiday pay or pensions contributions.
Equally, employers will want contractual protection and the ability to withhold tax so they are not left footing the bill themselves, which is unlikely to be permitted automatically. Yet more admin and cost ensue.
Yet do nothing, and the risks to the company are substantial. If HMRC decides that workers have been incorrectly assessed or the company has failed to take reasonable care, they can not only demand unpaid PAYE tax and NICs — with interest. They can also issue additional discretionary penalties of up to 100 per cent of the outstanding money owed. This could be a huge liability.
Then there is reputational damage. Companies with a name for making incorrect or careless determinations will find it near-impossible to hire workers, who will understandably worry that they will find themselves on the hook for unpaid back taxes.
And in the current environment, with the corporate world under the spotlight, companies that become known for trying to avoid paying their taxes or for taking insufficient care of their workforce are likely to face public opprobrium — which can quickly hit the bottom line too.
To help, the government launched the online Check Employment Status Tool (CEST) in 2017, which aimed to help companies and individuals determine where they were. But consultation reports found widespread dissatisfaction, with CEST unable to take account of existing employment status, tax case law, or the often complex nature of the private sector.
Consequently, an updated, refined CEST was relaunched in November 2019. Reports so far suggest that, whereas before it was near-useless, it is now merely less bad.
Given the issues and concerns, the government launched a consultation into IR35 at the start of January. Many are optimistically hoping that it will recommend further delay. But don’t count on it. The wording of the consultation is very clear: it is to “help implementation”, not delay or cancel it. Companies need to prepare.
There is still just about time to get advice and start planning, but the clock is running down fast. If companies are not ready by the spring, April really may prove to be the cruellest month.
Main image credit: Getty