IR35 in 2020 – What Business Owners Need to Know

IR35 - Budget 2020 rule changes

Most UK businesses have just a few short weeks before finding out what the new legislation will be regarding IR35.

The Spring Budget is due on 11 March, and the thought of sweeping reforms for their payroll system. on top of Brexit uncertainty, is only going to cause more frustration for businesses.

It is crucial that company owners get IR35 right by learning from the lessons of the past, so we asked Mirel Baila of Consulthon to explain what business owners need to know.

IR35 implementation headaches

Back in April 2017, when the current rules surrounding IR35 were introduced within the public sector, the final legislation was made available immediately before introduction, causing a huge headache for public sector companies over implementation.

The problem seems set to repeat itself this year with the finalisation of legislation so close to the implementation date of April 6th 2020.

It makes sense that UK businesses, organisations, consultants and contractors be urged to prepare themselves now for changes as there simply isn’t the time to delay things and wait to hear the outcome of the review currently being conducted for the final legislation.

Addressing employers’ concerns

Regardless of what the up and coming changes will have in store, employers shouldn’t be hesitant or hold concerns about using consultants or contractors following the changes that will come into effect on the 6 April, 2020.

Let’s not forget that independent consultants represent a very important section of the UK economy. There will be no reason for company owners to be worried about continuing to hire professional consultants to access the talent they need to help their business.

It is still safe to say that the vast majority of professional consultants are genuinely registered as self-employed, therefore as long as this status is communicated and confirmed, there will be no reason for business owners to stop hiring the professional experts they need.

Knowledgeable employers will be happy to hire and place genuine consultants outside of IR35, and consultants will help employers by confirming their status to help their clients to clarify their contractual requirements.

This level of clarity and communication between public sector business owners and hired consultants will help to negate the risk of hired consultants being seen as ‘disguised employees’ as a way of avoiding tax and benefit payments.

The dilemma faced by employers

For many business owners, especially smaller business owners not used to hiring contractors, you may wonder how can you tell if your contractor is IR35 compliant or not.

While it can be very useful to hire in a specialist consultant to help your business on a short-term basis, or for their valuable input on a specific project that you are struggling with, it may not be the case that your business will need their services year-round.

It makes little sense to hire someone as a permanent employee when you may not need their skills full-time as it can be costly for you in terms of PAYE, holiday pay, sick pay, NI and pension contribution payments etc.

It can be a huge waste of your resources to hire someone permanently that is not fully utilised or fails to contribute to your business growth year-on-year. However, it also makes little sense to employ someone and put them on your permanent payroll for just a few short weeks when you need their help, and then terminate their employment when you no longer need them.

Checking to see if your consultant is IR35 compliant

When hiring consultants, it makes sense to do a thorough background check and gather the evidence you need to clarify their status just in case HMRC decide to do a spot-check on you. Useful steps and pointers, include;

List differences with consultants’ work

It would be helpful for you to make a detailed list of how your consultants’ work is different from regular employees work.

Remember that a permanent company employee will be entitled to a set hourly pay rate and fixed hours, holiday entitlement, sickness pay and a workplace pension.

Consultants to use own equipment

Also note that company employees will be provided with all the equipment they need to perform their job, whilst a hired consultant will usually use their own tools and equipment.

Update paperwork

Clarify in any paperwork drawn up between you and your consultant that they are being hired to provide your company with a service and are not directly managed by you or your company.

Record communications

Ensure that you keep a record of all communications between you and your consultant, ensuring that none of the content implies that you have any direct control over their actions.

Limited companies can be safer

Wherever you can, choose to work with a consultancy that has limited company status rather than a single sole trader. It can be a safer option to hire a limited company because it will have its own business entity in the eyes of HMRC.

It can be far more difficult to prove that a hired sole trader isn’t working for you as a disguised employee.

Check consultants’ other work

If you want to hire a sole trader because they have the specialist skills you need, check to see that they are also working with other clients other than yourself.

Showing that they have a client history with a diversified income will make things look much clearer for you and an HMRC inspector.

The safest ways to engage a consultant

By far the safest ways of hiring a consultant to work with your company are:

1. Hire as fixed-term contract employee

Take a consultant on as an employee on a fixed-term contract. This is a risk-free way of getting the help you need when you need it the most. However, this method is problematic because it is the least flexible option open to you.

The disadvantages are that this can be an expensive option for you in terms of the on-boarding with your HR department, and for your hired consultant it can mean that they aren’t free to work with other clients and have to turn down work prospects.

2. Use a consultancy firm

Engage the services of a consultancy firm. However, you may end up paying high rates to hire a consultant as most large consultancies charge a small fortune for their services as they have large overheads to meet and have their own in-house management and training structure to maintain.

Let’s look at some more cost-effective options that you can consider.

What is the most cost-effective way to hire a consultant?

Hiring affordable help from a consultant without the associated IR35 risk can be done by choosing one of these possible routes:

Boutique consultancies

When looking for a consultant with a specialisation in one particular field or area of business, then using boutique consultancies is a way to hire in compliance with IR35 rules.

These consultancies will tend to directly employ their own consultants, which you can then benefit from temporarily.

Umbrella companies

Up until now, most companies have been able to avoid the IR35 risk by using an umbrella company to hire contractors through.

Umbrella companies collect the contractor’s earnings and pay the contractor after deducting National Insurance and tax contributions.

The contractor is the one taking the most risk here as they will end up paying more tax and NI but keep the same risks with unstable work, sourcing their own work, dealing with their own admin etc.

Consultant expert networks

These networks act to attract top consultants with highly specialised skills and experience. Each consultant will work on either a freelance or contractual basis, yet the networking platform will help to distinguish the consultant as a contractor and not a company employee.

The added clarity of using a consultant expert network to source your needed talent can be very beneficial to your business because the structure clearly shows that a consultant is clearly demarcated through having a record of several clients over a tax year.

For a business owner worried about the up and coming changes to IR35 regulations, it makes sense to work with a professional consultant expert network, where you can directly review and engage with the consultants you need while remaining IR35 compliant.

About the author

This article has been written exclusively for ByteStart by Mirel Baila, co-founder of Consulthon, a UK Management Consulting Expert Network. The platform offers businesses access to a wide range of skills, in a variety of sectors and countries.

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