Prepare now for new tax avoidance rules on contract workersAug 02, 2019
UPDATED legislation designed to combat tax avoidance by freelance workers in the private sector has received the rubber stamp.
Now local businesses should ensure they have the right processes in place well before the April 2020 introduction to avoid falling foul of HM Revenue & Customs, warns a leading business advice firm.
Commonly known as IR35, the Off-Payroll Workers rules were first introduced in 2000 to prevent freelance or contract workers providing services through their own limited company but in reality acting like an employee, therefore not paying the same National Insurance contributions on their earnings as a permanent employee would.
The legislation also stops organisations paying people in the same way they would a freelancer to avoid employers’ NI contributions or providing employment benefits such as pensions, holiday or sick pay.
IR35 initially placed responsibility on the worker to determine their employment status but following concerns from HMRC that only a small percentage were complying, in April 2017 the regulations changed for the public sector and the onus shifted to the employer.
From April 2020, the same rule will be applied to all medium and large organisations in the private sector and, based on lessons learned across the public sector.
Grant Thornton says it is vital for employers to prepare now.
“IR35 can be highly complicated due to the many grey areas involved in determining a worker’s employment status and if not managed correctly, the process can have both financial and recruitment implications for businesses,” says associate director Bethan Gill.
“Post 2008, the ‘gig’ economy has continued to boom as businesses look to adopt more flexible workforces to cost effectively manage peaks in activity. The number of freelancers in the UK rose by 18% in 2018 alone and there are now an estimated two million OPW operating across the country, so it’s likely many private companies across all sectors will be impacted by the new IR35 regulations.”
When IR35 changed for the public sector, organisations were given just four months to prepare. To overcome uncertainty, some adopted a blanket approach and included all contract workers on their payroll. However, this tactic can significantly increase the bottom line – the additional cost of Employer’s Class 1 NI and Apprenticeship Levy contributions per employee is 14.3% – and also reduce the available talent pool.
In demand freelancers may also refuse to work for organisations that insist on applying PAYE to their income and reducing their take home pay. In addition, HMRC does not consider this approach as taking ‘reasonable care’.
“Thankfully, private sector businesses have been given longer to adapt but the clock is still ticking to establish the necessary processes and controls,” says Ms Gill. “Leaving it too late could be costly and put companies at risk of investigation by HMRC and subsequent financial penalties.”
HMRC has introduced an online tool to help organisations determine the employment status of workers but this has come under fire for its limitations and has been found unreliable at employment tribunals.
To combat this, Grant Thornton has developed its own status assessment platform to support businesses with the IR35 challenge, using artificial intelligence to provide assessments that are more consistent and reliable.
The tool also produces a clear audit trail and a database that provides an overview of all freelance workers within a business at any one time, so employers can assess the cost-benefit of its OPW population.
“The experience of the public sector suggests that for many organisations, a full change management programme may be required, so preparation should begin as soon as possible,” says Ms Gill.