The upside to IR35 legislation
Victoria Roythorne is Outsource UK's Head of Compliance and Contractor Care:
"Like it or not, IR35 is coming to the private sector. Whilst last month’s Budget announcement threw a slight curveball in that it will only be applicable to large and medium sized businesses, for many HR departments, this legislation is a gamechanger.
This is because it forces HR to look at something it’s not used to dealing with – the supply chain. This legislation in particular is challenging because the responsibility for compliance will fall between departments. In theory, it could sit with HR, legal or procurement, so large and medium sized firms need to find a way to overcome departmental fiefdoms and drive a compliant culture. This can be done by learning from the challenges encountered by the public sector and preparing for any potential road blocks.
As the public sector realised, this is a legislation alteration which will change the face of contracting.
For the first time, it puts the onus on firms to differentiate between roles which are either inside or outside the scope of IR35. So, if the firm gets it wrong - and they engage contractors directly - they’re now potentially footing the bill for unpaid taxes – an unappealing prospect for many.
HR now has a race to not only understand the law change, and how it influences not only the supply chain but the business too, and mitigate the risks it presents (such as a nasty fine, or lack of availability of flexible resource). So what do HR departments need to focus on to achieve this? Below are the three areas I would concentrate on first.
- Get on top of internal processes
Alongside understanding the nuances of the legislation, one of the first steps is auditing how IR35 will affect the business, both in terms of current workers, but also future new resourcing needs. Needless to say IR35 will affect some firms more than others, but until HRs know how it affects the daily ins and outs, no long term strategy can be implemented. This is not without its challenges. Aside from the Chancellor’s rather vague comments regarding the size of businesses who the new rules will affect, some businesses will only use contractors or contingent workers on an ad hoc basis, whereas others may have significant contractor populations, and will be reliant on the specific expertise that these workers provide. Therefore, mapping out how the business will be affected, and on what scale, is vital.
Much like procurement departments would audit a supply chain, HR departments now have the chance to apply this meticulousness to people processes, and bring it under their control once and for all. We know from experience that HR doesn’t always have full oversight of the breadth of contractors within the business, due to the fact that individual managers have the power to bring people on board as part of department territories. However, using IR35 as a catalyst gives HR the impetus to action a review of internal hiring practices. This has a twofold benefit – compliance and consistency.
From April 2020 the IR35 changes will shift the responsibility onto hirers, (not the individual) contractors to assess tax status. If the legislation mirrors recent public sector reform, it will be firms footing the bill if they engage contractor workers directly and don’t meet the new IR35 compliance requirements in terms of tax and NI collections at source. Whilst using compliant agencies can help mitigate these risks, there is still a significant new administrative burden on businesses, which HR may well end up leading. Taking a proactive stance and mitigating potential risks from the offset will be key to a successful reponse.
- Take responsibility for future hires
As IR35 touches so many departments, it needs one to take the lead and in many businesses this will naturally sit with HR. Once the human supply chain audit is complete, firms need to allocate responsibilities and HR needs to ensure it’s holding necessary stakeholders in the business to account, alongsihde regularly reviewing the process to protect the firm’s compliance standards on an ongoing basis.
- Plan for the worst – then you won’t need to hope for the best
Firms can be ruined by their supply chain, as they pose a significant risk to a business’ reputation and balance sheet. People are no different – whether they are permanent or temporary. Every company should have a people strategy. Granted this shouldn’t be set in stone, as every business will need to pull in additional resource from time to time, but IR35 again presents an opportunity to go back to basics and review any strategy, including the use of contingent workers. Contractors provide a lot of value to many firms, and will continue to do so, but it should be noted there are also other options available for securing flexible resource – such as using bench consultants, or Statement of Work contracts. Therefore it’s up to HR departments to map out projected people needs and best strategise how these requirements can be met – both in the long and short-term – and address any legislative considerations which need making.
Resourcing a business is no easy task, and HR already had a lot on its plate before IR35. However, instead of seeing it as a burden, it’s actually an opportunity to streamline business process and drive a consistent, compliant culture.
For more information and to schedule an audit with Victoria and the Outsource UK Compliance team, email her directly here.