How businesses can stay on the right side of IR35

Just weeks before it was scheduled to come into effect, the UK Treasury announced that reforms to the IR35 tax legislation will be postponed by a year, due to pressures brought about by the ongoing pandemic.This legislation, which puts the legal responsibility for determining the IR35 status of contractors onto employers, has been perceived as a major threat to big businesses in the UK. So much so that an increasing number have announced (or been exposed as having) “all in policies”, where companies avoid engagements with their contingent workers in a Ltd capacity and instead enforce that they must all be hired on a PAYE (pay as you earn) basis.However, while the postponement surely came as a relief to many businesses who weren’t fully prepared, changes are still coming. If anything, the Covid-19 pandemic has shown us just how important it is for businesses to prepare themselves for unanticipated disruptions.Certain sectors and skillsets – from healthcare and construction to warehouse and sanitation – are proving hugely important during this time. And the critical talent shortages many companies are facing are being filled with contingent workers. Therefore, as our working world is changing dramatically, businesses still need to prepare for this legislation. This means taking into account the learnings and observations they’ve witnessed over the past few months to ensure that they are contracting the valued workers that are so crucial to their businesses and communities, in exactly the right way.
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The loft conversion
Of course, IR35 hasn’t been the easiest regulation to understand and yet this is where businesses need to start. A simpler way of understanding the framework is by thinking of it as if you were to hire a contractor to build a loft conversion. More than likely, you would begin by scouring the internet to gather names and request quotes, basing your decision on which aspect of the conversion would be the most important to you: presentation, quality, cost, etc. All of this is completely fine and legal.When the builder arrives, they bring their own tools. You’d show them to the loft space, describing how you imagine the space being converted and the overall look you’re hoping for. Naturally, you would agree to a price along with the length of time required for the conversion to be completed.Whether they finish early or late, you pay the same. If the builder sends one of his colleagues, it’s not a problem because you trust that they know how to convert the loft according to your brief. Whatever amount of time they spend working, you don’t pay them for half a conversion – you wait until the job is done.Once fully converted, they come back to you to close out the job. You would take a look, ideally say it’s exactly what you wanted, and then pay up. If it’s terrible and not at all what you had in mind, you’d pay nothing, expecting them to continue working until it is just right before you pay them.
Commonalities with IR35
So, what made IR35 necessary in the UK in the first place? Well, if we are to go back to the loft conversion analogy, the builder might show up, but then expect the homeowner to provide all of the tools. Or, the homeowner might provide detailed instructions on how it should be done every step of the way, rather than explaining what the loft conversion should look like in the end.They might even want to hold regular meetings to check progress and work on new goals, or even get the builder to work on another project, like fitting a new kitchen or managing the gardener! Lastly, if it’s not done at the end of the day, the builder will still be paid, and also paid for every day worked until the project is completed.The key point here is that businesses need to be hiring contingent workers as if they were contracting someone to convert their loft. If you’re wondering whether you’re compliant with IR35, start there.
Staying on the right track
Research we recently conducted with Oxford Economics showed that 42 percent of total workforce spend is going to the external workforce, therefore, it is imperative for organisations to conduct strategic workforce planning that includes both traditional employees and more flexible, contingent labour.To be able to conduct total workforce planning, organisations need to first assess all current contracts and get a better view on whether contractors are treated like short-term service providers or long-term employees. Identifying this earlier allows the time to measure and mitigate the risk of misclassification before it’s too late. It’s also a good idea to look deeper into your supply chain to identify any extended exposure, as this will require evaluation and proactive management too.Finally, businesses should take an integrated approach across the business as IR35 is only one of many compliance checks during the company’s recruiting and onboarding processes. Having a connected landscape and automation between core applications allows customers to have a single view and better manage how both traditional employees and contingent workers are engaged. Legislation like DBS checks, Right to Work, Health and Safety, etc., should be managed appropriately with a single, comprehensive view into all. Integrating and automating these HR processes means that organisations will be able to keep operations running with the right talent in the right roles getting work done.By focusing on all of these different considerations, organisations will be able to understand whether they are treating contractors like employees or like genuine contingent workers. To put it simply, if you really need a contractor for a loft conversion, then hire them for the job and let them get to work. Enjoy the new space!Mandeep Pangali is Head of SAP Fieldglass and SAP Ariba, UK & Ireland
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