How to prepare for the IR35 reform, the UK’s freelancer work-status mandate for the private sector

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Spend Matters welcomes this guest post from Martin Konrad, co-founder of Shortlist, a freelancer management system provider based in San Francisco and with an office in London.

The UK government has announced that the IR35 reform introduced to the public sector in 2017 will also be rolled out to the private sector in April 2020.

What does this mean? In less than nine months, all medium and large private sector businesses using freelancers will be responsible for checking their employment status with every engagement. If it is determined that freelancers should be treated as an employee for the purposes of IR35, the business will need to deduct income tax and national insurance contributions from payments made to freelancers.

As the private sector relies heavily on freelance workers, this reform will have a significant impact on the entire freelancer economy in the United Kingdom.

In this article, I would like to discuss how companies can determine their freelancer's IR35 status, and how your company can prepare for the upcoming reform.

How to Determine IR35 Status

Firstly, it’s important to understand that it isn’t the freelancers being judged on IR35 status, but the specific contract.

Therefore, it’s important to know whether terms and conditions in the contract or the freelancer’s working arrangement constitute employment, rather than a business-to-business arrangement. If there’s evidence to suggest employment, one of your contracts could be caught by the new legislation.

There are three elements that play a key part in deciding whether a freelancer’s contract falls under IR35 legislation. These are:

Substitution — Basically, the freelancer is providing services as a company and should be engaged as a business, not an individual. Also, the skills required to perform the service are the company’s — not the individual’s. Consequently, as long as the services can be carried out satisfactorily, the freelancer’s company should be able to assign whichever representatives it wants.

In most cases the freelancer is obviously the only person in the company, but it’s vital that the “right of substitution” is in the written contract and that it exists in reality.

Supervision, Direction and Control — The level of control exercised by the client over the services that are to be provided by a freelancer is very important when determining IR35 status.

In some circumstances it is acceptable for a freelancer to mutually agree with the client to provide a particular service at a specific time and place, but he should not be subject to any control or supervision from the client. Further, it should be clear that the freelancer is able to provide the service however they choose to do so.

Mutuality of obligation (MOO) — In simple terms, this means that in order for an employment relationship to exist, there must be an obligation on a client (work provider) to provide work and an obligation on the individual to carry out the work. On the contrary, a self-employed individual such as a freelancer will provide the service they are being contracted to provide and will finish with no further expectation of work.

Therefore, it is important that a freelancer has the right to walk away from a contract early if they so choose.

There are some other indicators that the relationship between the freelancers and the client could be of employment types. These indicators include financial risk, right of dismissal and exclusivity rights, but they carry far less weight than the three key elements above.

How to prepare for IR35 and minimize the risk

After a determination that IR35 applies to a contract, the client will have several new responsibilities — including payment calculation on behalf of the freelancer, tax and NIC deductions, reporting to HMRC, record-keeping and sending worker P45 forms at the end of the contract.

With no proper tools and processes, this may cause a great administrative burden that can lead to a lot of blanket determinations, which could typically result in a whole freelancer workforce being placed inside IR35 that is unfair to freelancers operating a genuine business. The cost of working inside IR35 is so significant to freelancers that the least these individuals want is a fair review of their working arrangement.

Despite the speculations, the changes are manageable. There are several things that companies in the private sector can do now to prepare.

1. Take steps to identify freelancers that work for your company

Regardless of whether you work at a medium or large private sector company, you should identify the freelancers your company engages.

What is their population? What is their current IR35 status? Will they be working on this particular project come next April? How important are they to the delivery of your key targets?

It’s good to start by implementing a system of records that can quickly gather information from your spreadsheets into one centralized database. Modern FMS systems like Shortlist’s will let you easily configure a survey that automatically creates freelancer profiles as they answer the questions.

2. Review your contracts

Many of the key elements of deciding whether IR35 should be applied to a freelancer are stipulated under your contractor agreement, so this document could determine whether the off-payroll rules apply.

Thus, it is vital to start reviewing your existing contracts, roles and responsibilities to ensure that freelancers are sufficiently distanced from the business so as to be truly self-employed.

Where it is clearly evident that supervision and control is required, or right of substitution isn’t allowed in the contract, then the HMRC will most likely assume that despite the freelancer being seemingly self-employed via their own limited company they are in fact an employee of your business, and fall under IR35.

Avoid adding:

  • Start and finish times appearing in the contract
  • Specific days the freelancer should work in the contract
  • Including lunch break times and duration in the contract.
  • Specific clauses stating that the client has supervision and control over the freelancer

Look for a tool that can automatically add job fields to the contract based on your template, so the process of creating a job and requesting approval is more streamlined.

3. Implement new policies

Communicating the upcoming changes to your team is an important part of execution, and it’s where seeking the appropriate technology solution or professional service could prove extremely helpful.

Starting with the job advertising, these job ads should make it absolutely clear whether the role is for the contracted period of work to be conducted by a self-employed freelancer or whether it is intended as a more permanent internal role.

Moving on to an on-boarding procedure, every new freelancer should provide you with evidence that they are a genuine business. You will need to collect and verify information such as incorporation documents, insurance, VAT registration certificate, and ideally, the information should be vetted by experienced workforce classification specialists that can determine the IR35 status.

Finally, you will want to establish a new process that introduces some governance over the work assignment. Even though your freelancer has successfully passed the initial screening and on-boarding, it’s the work arrangement that may put him or her inside IR35’s provisions.

4. Communicate with your freelancers

Your freelancers need reassurance that in the light of upcoming reform you will prioritise accurate IR35 determination, allowing them to operate outside the IR35 legislation. It’s best to start communicating your plans early, as well as any changes.

5. Use the right tools

Implementing changes without the right software to support you can be unduly challenging and expensive. A modern freelancer management system (FMS) can automate the process of screening, on-boarding and freelancer engagement. There are providers such as Shortlist that could also offer legal expertise and payroll services in conjunction with talent management technology.

By implementing the necessary processes ahead of time, educating your workforce, and using the right tools, most employers should be able to avoid any potential liabilities — while also ensuring the freelancers they work with are fully aware of how the changes will affect them.

Private sector organisations have just nine months to prepare for changes to off-payroll working, rules that will put the burden of categorizing contractors’ and contingent workers’ tax statuses onto the businesses that hire them.

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