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IR35 Demystified: Risk

David Roberts

18 February 2020

by David Roberts

( Words)

On Wednesday 5th February, La Fosse hosted a panel event to discuss the IR35 legislation coming into effect on 6th April 2020.


There’s been a lot of opinion and press coverage of IR35, but not a lot of clarity. We want to make sure that our clients are prepared and in the know regarding the upcoming changes.



Facilitator:

David Roberts – Head of Contracts at La Fosse

Panellists:

Daniel Haslam – Director at giant group; involved in the public sector IR35 rollout in 2017 so has seen the reaction first-hand

Darren Offord – Director and IR35 readiness consultant; worked with HMRC to design the CEST tool

Kevin Barrow – Partner at Osborne Clarke (our partnered law firm); has spoken at 180+ IR35 events

Tania Bowers – General Counsel at APSCo (industry standards body); extensive knowledge of best practice and how we can interpret the law


What steps can businesses take to minimise risk?

It’s crucial that end-user businesses consider how much risk they want to take on board when working with contractors. This ‘risk appetite’ tends to vary per industry – more agile, fintech organisations may take a high-risk approach due to a fast-moving talent pool, whereas more established organisations such as banks and some pharmaceutical companies may opt for a blanket approach. As the current legislation stands, blanket assessing all contractors as inside is a legally acceptable move, however the end user must consider the high risk of losing their best talent to competitors if they do not take care in their determination status.

After deciding a risk appetite, the next step is to set up a governing structure that is prepared to present evidence for reasonable care if questioned. It’s vital to consider all environments and departments within the company, setting (preferably automated) processes in place to ensure that any potential HMRC Treasury checks can be met by solid evidence, backed by a robust programme and platform.

Most importantly, it’s all about communication. Understand your stakeholders’ positions and inform them on the process. Ensure hiring managers work diligently and don’t try to gamify the solution, as this could lead to legal ramifications. Finally, aim to get contractors through the process as quickly as possible to allow time for arbitration and discussion.


What other solutions are there?

Increasing numbers of businesses (such as banks, telecoms and life sciences firms) are choosing to take IR35 out of the equation completely and forgo PSCs by switching to a PAYE solution. This negates the need for status determinations as IR35 is irrelevant to the supply. There is some uncertainty as to how this will play out in the long run, but for businesses with a high number of contractors, this is an effective short-term de-risking solution.

What are the other risks faced by businesses?

Although businesses using a blanket approach can de-risk from a client perspective, they are likely to still face increased costs associated with this. This then turns into a supply and demand issue – companies with lots of employees need to decide how business-critical each contractor is. The least risky move in a lot of cases is to go down a PAYE route and increase rates to ensure the net pay for business-critical contractors stays the same and they are less likely to walk away from the company. Daniel suggests that end users split their contractors into three categories or ‘buckets’:

  • Absolutely essential contractors – what do we need to increase rates to in order to keep them happy? This generally applies to around 10-15% of contractors but can vary from business to business.

  • ‘Nice-to-have’ contractors – meet halfway and increase the employer’s NI but let them pick up their PAYE and employee’s NI

  • Non-essential contractors – make no compromises on rates and let them take the full hit or decide to terminate their employment in order to recoup costs

In the public sector, there were no ‘teeth’ going further up the supply chain, however in the private sector, this is not the case – people at all levels are liable. This is fortunate as it ensures everyone has a vested interest in driving change.

Many companies are also choosing to slightly amend their essential contactors’ terms of engagement in order to place them squarely outside of IR35, thereby taking pressure off budgets. Companies with this flexibility can use this to protect themselves in terms of both budget and retention.

Above all else, it’s important to strike a balance between compliance and over-complicating risk assessment. In some large corporations, the risk related to IR35 is being assessed by a tax director who manages the firm’s reputation with HMRC, however this is not always necessary and often means the business gets left behind. If companies are taking reasonable care to justify that contractors are outside, there is a low chance of HMRC questioning the decision.


How can you tell which umbrella companies to trust?

Whether you’re a contractor or employer, there are audited accreditations that you can look for when searching for a reputable umbrella company to work with. APSCo have an affiliates programme which involves a ‘Professional Passport’ audit, and there is also a trade organisation for umbrella bodies called the FCSA. This gives workers a level of comfort and choice, but Tania recommends that all contractors still have a right of audit in their contract.

As an employer, be wary that some of your contractors may be approached by umbrella companies that may be operating unethically or even illegally. Under the Criminal Finances Act, this could also make you liable for tax evasion, so it’s crucial to carry out random spot-check audits of your contractors to check how they’re being paid. Look at the umbrella company’s RTI information, financial stability and balance sheets, as well as redacted BACS transmission sheets.


If you’re working with a recruiter or staffing company who are setting deliverables and providing staff on a statement of work basis, are you de-risked as a business?

Yes, but be careful what you wish for. Not all consultancies are vigilant enough; less sophisticated staffing agencies may just be keen to find a solution as quickly and easily as possible. As the end client, it is your responsibility to do your research first. Ensure that any consultancy you work with ensure that instead of simply re-packaging their supply of people as a statement of work, they take time and care to deliver services, take the risk for these services, get professional indemnity insurance, and appoint an expert project manager, among other processes. As the end client, it is your responsibility to do your research first if you choose to use a consultancy.

Our experts advise companies ‘hedge your bets’ and issue an SDS in collaboration with the consultancy in order to de-risk yourself.

There are still grey areas, however. The new law exempts small businesses from IR35, and as such, some people have identified a ‘silver bullet’ which allows them to create their own small consultancy firm and fly under the radar.

As defined by the Companies Act 2006, a small business is one which means meeting two or more of the following criteria:

  • Annual turnover is no more than £10.2 million

  • Balance sheet total is no more than £5.1 million

  • No more than 50 employees


Where the end client meets two or more of these criteria, responsibility for determining the IR35 status of a contract remains with the PSC and the changes do not apply.1

In addition to IR35, which concerns itself with identifying ‘disguised employees’, there is also another piece of legislation: Managed Service Company Legislation – regardless of whether people are genuinely self-employed or not, if they set up a small company to provide services that has the hallmarks of a managed service company, anybody who interacts with them is still liable.

Read more:

IR35 Demystified: Liability

IR35 Demystified: Assessment

Get in touch:

If you have any further questions regarding IR35, please contact our specialist:

Katherine Miller
Commercial Support Manager
katherine.miller@lafosse.com
020 7932 1643