As there is a massive shift in the way organizations hire and deploy workforce, many enterprises and businesses are now employing contractual, freelancers, and flexible workers. Unlike permanent employees’ payroll and taxation processing, Flexible and contractual staff financial transactions and tax regulations are different. Hiring managers should understand the various aspects related to IR35 compliance as the legislative changes pose an increased impact on the HR businesses going forward
What is IR35?
IR35 is a rule set that governs the laws to determine whether a self-employed worker pays the taxes genuinely or indulging in any frauds to cheat the tax system. IR35 regulates the taxation procedures of the independent and contingent workers and evade the chances of frauds and pay scandals. Employers have often used freelance status to pay lesser taxes to the government. Contractors wrongly calculating their taxes can bring a lot of loss to the economy, which is around a whopping 1.2 billion pounds by the year 2022.
What is changing with IR35?
Earlier contractors used to assess their earnings and determine whether they fall within the regulations of IR35. Based on their evaluation, they paid the tax amount; however, as mentioned in the finance bill, the new IR35 provision coming in April 2020, the tax regulations and compliance are maintained by the contracting party or the PSC (public service commission) or the organization that hires contract workers. Thus it becomes the responsibility of the hiring managers and the recruitment authorities to comply with the IR35 terms and conditions.
The new rules enable HMRC (Her Majesty’s Revenue and Customs, department of UK government responsible for collecting taxes) to monitor IR35 compliance in a more straightforward manner.
The changed rules applicable to
- Private sector mid and large level business in the private sector which utilizes workers
- The intermediary pays the contractor or freelancers. Most of the times’ recruitment agencies are the paying party.
- Contractors who provide services to the businesses.
What Does This Mean For Hiring Managers?
Hiring managers should understand the various aspects of the new tweaks in the IR35 to comply better. It is always beneficial to have an open discussion with the various stakeholders in the business to understand every possible area where the changes can be applied. Hiring managers are responsible for the correct determination of whether the employee falls inside or outside the IR35. They also need to ensure that the correct tax is paid to the HMRC at the right time.
What can Hiring Managers do to compliance with IR35
Making sure that the contracted employee has shared all the vital details honestly helps understand their overall tax liability. Asking them the number of PSCs they work with is a piece of crucial information. You should also have a system in place in which every person involved in the employment chain is engaged and informed. The HMRC recommendations mention that hiring managers should also audit the various processes like HR, On-boarding, payroll, etc. to ensure transparency at all levels.
IR35 Insurance and its implications should also be reviewed thoroughly. Hiring managers can also look into the indemnity insurance of the contractor to gauge the employee’s IR35 status.
The implications of the IR35 rule are different for different industries. It largely depends on which business uses the contractual workers and for what job. IR35 determination is closely related to the nature of the role the contractual does on the job. Thus different industries have different control over the contracted staff, and hence, hiring managers should be prudent in determining the effect of IR35 in the domain, industry, and vertical they are hiring.
How Can Recruitment Companies Make IR35 Easier for Hiring Managers?
Recruitment firms can help the candidates and hiring managers a lot by using their expertise and the right tools to understand and comply with the IR35.
The organizations and hiring managers are held fully responsible for the IR35 compliance if they deal with the PSC or the contractor directly. The IR35 determination is indeed tricky, and it is always beneficial to contact the right recruitment agency to help you deal with IR35.
Another essential point to consider is IR35 insurance, which most of the reputed recruitment organizations provide to their contracting staff. They are already developing their insurance packages for the contracted staff to indemnify everyone involved in the employment chain.
The point of caution here is that the regular contract reviews are required, which the reputed recruitment companies duly do.