5 Reasons IR35 Will Result in You Getting Fined

The HMRC IR35 Soft Landing has now concluded and private sector firms find themselves firmly in the crosshairs – a place many a government department has found uncompromising.

Last year, IR35 fines were issued to multiple government departments, who have used flawed processes and frameworks in order to manage IR35 compliance for their contractors.  To name but a few, DWP were fined £87.9m, Home Office got hit for £33.5m, and HM Courts and Tribunal Service got an uncomfortable £12.5m bill.

There are numerous reasons these fines were issued, but commentators and experts agree there are some key principles that were not applied by the public sector.  More frustratingly, the private sector does not appear to be learning from the public sector’s mistakes.

Here are 5 common failures that we have identified when managing IR35 compliance on behalf of our customers, and ways to avoid them:

1. Line Managers do not have the case law and legislative IR35 knowledge to correctly utilise automated tools. This leads to mistakes and inevitably, incorrect determinations, and does not meet the HMRC requirement of ‘reasonable care’.

2. Line Managers, Contractors, Recruiters all have conflicting interests and pressures when carrying out determinations. Hiring clients should utilise a neutral 3rd expert party to undertake the determinations to avoid ‘white-washing’ the engagement as Outside IR35.  Ensure that IR35 determinations are guided by someone with deep, practical knowledge of the legislation to reduce the chance of mis-interpretation.  It is also useful if assessors are experienced at working with businesses, with a broad understanding of the service requisition process, recruitment policies and internal systems. This helps them advise on process improvements and understand your organisation’s end to end challenges.  Your chosen partner should value a frictionless experience for stakeholders and the contractors themselves – to encourage buy in and comfort in following the process.

3. Short term compliance solutions were implemented when the legislation was introduced, and not updated to meet the on-going changes in case law. This resulted in standards slipping, compliance steps being missed and a build up of HMRC liability.  Update your approach and knowledge regularly in order to maintain compliance, or select a partner that can take this responsibility off you.

4. Reasonable care requires hiring organisations to re-assess engagements if there is a material change in the nature of the engagement or terms and conditions. This rarely gets picked up without the right internal processes in place.  Work with line managers, internal system configurators to ensure that when material changes to the terms of an engagement or working practices occur, a reassessment is triggered.

5. Hiring organisations normally have procurement and HR departments – procurement buying services, HR hiring talent.  Due to a lack of meaningful and effective identification processes, PSC suppliers often slip through via the procurement channel, leaving stakeholders responsible for compliance completely unaware that a PSC is providing services to the organisation.  On this note, Colnort has, on many occasions, been presented with a long list of suppliers drawn out from a procurement or finance system with the hirer having little expertise or experience on how to effectively identify PSCs.

To speak to IR35 determination specialists, please call CoComply on +44 (0) 203 051 9792, email [email protected] or fill out the form below.