IR35 implications for in-house HR practitioners

As of 6 April 2021, private and voluntary sector businesses with an annual turnover of over £10.2 million, a balance sheet worth more £5.1 million or more, and 50 or more employees, have been responsible for deciding whether IR35 applies, and for deducting tax and NICs from contractors’ fees paid through intermediaries when it does not. How should you manage the process?

Five initial steps to help your employer manage IR35

What should you do?

Step 1

Decide who in your organisation is responsible for ensuring that the business is compliant with the IR35 regime, and ensure they’re suitably trained in making IR35 determinations. It could be you, or someone in finance or legal.

Step 2

Identify those supplying their labour through a public service company (PCS) or other intermediary.

Contractors could be providing labour:

direct as PSCs (that is, the contractor is a limited company)
direct as sole traders (that is, the contractor is an individual)
via a supply agency or other employment business as well as a PSC
via a supply agency or other employment business as sole traders.

For IR35 purposes, you need to identify those who fall into categories (a) or (c).

Step 3

Audit the arrangements to assess which contractors fall within and outside of IR35. Ensure a clear and consistent methodology is used, decisions are recorded, and data is kept secure.

To help you make IR35 determinations, HMRC has created a Check Employment Status Tool (CEST), with supporting guidance. It’s designed to establish the three main factors used to determine IR35 status; namely:

substitution
financial risk
control.

However, there may be instances where determination won’t be binary and CEST can’t make a determination, in which case you might need specialist help in making a judgement.

While you’re not obliged to use CEST, it has the advantage that the result is binding on HMRC, provided all the relevant information has been correctly inputted.

Step 4

Communicate the determination, known as the status determination statement (SDS) and the reasons for it to the contractor, their PSC and the agency. You’ll also need to give details of the appeals process that you’ve established for those who wish to challenge your SDS.

Step 5

Consider any documentation and systems changes that are required. For example:

If necessary, review and amend internal processes for obtaining approval to use contractors.
Review and amend (if necessary) on-boarding processes. This could include having an authorised list of supply agencies and ensuring there’s a signed contract with the PSC or supply agency before any work is done.
Review and update template contracts for PSCs and supply agencies to incorporate IR35 changes and tax and status indemnity and warranty protections as appropriate. Ensure contracts reflect your status determination.
Ensure that payroll and accounts payable systems can cope with the changes (and that VAT and PAYE/NICs can both be operated where appropriate).

Understand the possible consequences for independent HR consultants by visiting IR35 implications for consultants.

Disclaimer

Please note: While every care has been taken in compiling this content, CIPD cannot be held responsible for any errors or omissions. These notes are not intended to be a substitute for specific legal advice.