Finance, Tax & Admin

How SMEs can protect themselves from IR35

Kris Simpson | 28 September 2021 | 3 years ago

ir35

It’s now five months since the introduction of the IR35 tax and already it’s clear that there are lots of new challenges for businesses to be aware of when it comes to managing the disruption it brings.

Preparation for the introduction of IR35 was already heavily disrupted by Brexit, but then further chaos arrived with the COVID-19 pandemic and the pivot to remote working. Many large businesses had the extensive resources to prepare for the changes, but many SMEs are still trying to get to grips with the upheaval of the new system.

The talent pool is shrinking

The UK has a major skills shortage in key areas like IT, technology and construction – and the paralysing shortages now affecting the logistics sector have dominated the news agenda for weeks. The UK talent pool has dramatically shrunk in recent years, due to Brexit and gaps in education and training, as well as the COVID-19 pandemic which hit contractors and freelancers especially hard.  But in part some of the UK’s current staff shortages can be attributed to the effects of IR35.

Workers are refusing assignments inside IR35 in favour of working with smaller clients who are exempt from the new rules or businesses who will offer a higher rate to compensate for being inside IR35 legislation. The flexibility of contract work has also been massively impacted by IR35 and contractors are moving between jobs far less often than they might have done previously, which means they are commanding much higher rates of pay to combat the shortfall.

It leaves businesses in a difficult situation: do they either increase the pay rate, ignore the legislation and hope for the best or seek a permanent member of staff to complete the work?

Protecting your business

There is no quick and simple solution to the problems that businesses face because of IR35. Official advice states that businesses should use the HMRC CEST tool – but recent fines and penalties within the public sector have shone a light on the failings of the CEST tool and many feel that it is no longer safe to use it for protecting their business.

There are other solutions available for businesses – but all of them come at a risk too. None of these methods have been officially tested against the new rules so it comes down to balancing risk versus reward. After choosing one solution, sticking to it is the best course of action.

Create a process to manage IR35 that you then never deviate from. Continually review and test it – as well as implementing comprehensive staff training to ensure that accounting teams are completely aware of the intricacies of IR35 rules. Maintaining consistency is the single most important thing you can do for your business when it comes to managing IR35 because ensuring that each assessment is undertaken identically every single time will help prove that the business followed a set process and showed no prejudice towards contractors who tried to change the decision.

Lessons from the last five months

Make sure to read up on and understand the key elements that HMRC use to test IR35. And don’t be afraid to seek legal advice when you need it. Some fines given out to businesses considered to have fallen foul of IR35 rules have been fined in the region of multi-millions – so paying for legal advice is far more cost-effective compared to the possible fines if you get it wrong.

Businesses need to look at the solutions, explore what they provide and ask exactly how they protect business interests. It doesn’t really matter which tool or solution businesses choose to manage IR35, as ultimately the risk is the clients. Contractors could help to mitigate the impact of IR35 by using PAYE umbrella enterprise solutions, like Cool Company. These solutions pay salaries and raise timesheets on behalf of the contractor and streamline the invoicing process.

Many businesses might have assumed that nothing would come from this change, but the last five months have proved that HMRC are serious about stopping tax avoidance in the contractor workforce. More than ever, businesses need to realise the importance of being prepared.

 

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