IR35 reforms to be introduced to the Private sector from April 2020 will largely mirror the reforms applied to the Public sector two years ago. The Private sector has an opportunity to learn lessons from the Public sector in how the reforms were interpreted and mitigate the impact of IR35.
Despite the recently announced Government review, there is no way to escape the more robust version of IR35 being foisted on the Private sector in April this year. As with any major regulation change, the sheer effort to plan, workout and implement the new system makes it highly unlikely that IR35 will simply ‘blow over’ and leave everything as it was. More realistically, IR35 marks a long-term shift in the way HMRC and the Government view and interpret non-permanent work and how additional tax revenue can be procured.
Food & Drink companies should not leave IR35 planning it to the last minute. This is exactly what some organisations did when the reforms were introduced to the Public sector in 2017, increasing the risk of fines due to misinterpretation of the rules. Food and Drink companies should prepare in advance, understand the different scenarios that could play out and have a strategy that will provide continuity of skills and talent with minimal disruption.
Public sector organisations found the Governments 'Check Employment Status for Tax' (CEST) tool very useful in determining whether an individual is inside or outside of IR35. It's advisable for Private sector companies, including Food & Drink companies, to use the Tool also. To utilise it effectively, Private sector companies need to input specific information such as: details of the contract, the worker’s responsibilities, who decides what work needs doing, who decides when, where and how the work is done, how the worker will be paid, if the engagement includes any corporate benefits or reimbursement for expenses.
However, to throw a spanner in the works, the limitations of the CEST tool must also be noted, as some Court judgements resulting from litigation on ‘employment status’ disputes have differed from results given by the CEST tool. Both Interim Managers and Private sector companies are therefore advised to keep records and document what information they used for determination, and what information they put into the CEST tool.
Food and Drink businesses should not throw the baby out with the bath water and implement a 'blanket ban' on the use of Contractors and Interim Managers. An area where Private sector companies could learn from is, how some Public sector HR departments dealt with the minority of Contractors engaged for multi-year periods. Some HR departments felt these long-tenured non-permanent workers were exactly the type of individual that HMRC were targeting, so rather than review each Contractor on their individual merits, they implemented a ‘blanket ban’ on all Contractors.
What the Private sector can learn from this is that 'one size does not fit all' and HR Departments with Food & Drink companies need to review recruitment policies and processes to allow assessments of Interims and Contractors on an individual basis, incorporating definitions of what constitutes a Permanent employee based on available government information and guidance.
‘Control and direction’ is one of the ‘tests’ to determine whether an individual is truly a Contractor / Interim and not a disguised employee. The genuinely self-employed have more influence over how they complete the work they’ve been assigned to do. HMRC will judge whether a Contractor / Interim has autonomy in the way they undertake a project and the Contractor / Interim must demonstrate they ‘influence’ how they complete the work and possess autonomy in how they operate.
For Contractors and Interims, demonstrating ‘Control and direction’ can sometimes be difficult within the Public sector, where an autocratic and command management style is often used to control how individuals perform their tasks. In such a culture, where there is very distinct lines of control and reporting, it can be difficult for Interim Managers and Contractors to demonstrate they are in control of the following parameters: how they work, how they establish the scope of service and the hours they work. These parameters are often more rigid and difficult to prove in the Public sector and this has led to some Public sector organisations wrongly concluding that Contractors / Interims have not passed the ‘Control and direction’ test.
An opportunity therefore exists for Private sector companies to learn from the mistakes of the Public sector with respect to the ‘Control and direction’ test, by ensuring there are no ‘grey areas’ that leave employment status open to interpretation. HR departments can assist when it comes to 'Control and direction', as they can introduce elements of entrepreneurialism to an assignment, implement a framework where the Interim Manager is working to an authoritative management style, use non-restrictive contracts that do not pin down ‘set hours’, and allow Interims to strategize and innovate, and give them freedom to apply a pacesetting style to their work.
HR departments within Food and Drink businesses can also review Talent Acquisition Strategies and incorporate clear definitions of what a permanent hire ‘looks like’ versus a non-permanent hire. Furthermore, HR can map their existing talent and gaps, where interim talent can be utilised, justifying why certain ‘skill gaps’ are most suited to a non-permanent appointment. Such analysis of talent will assist Food sector companies in remaining compliant in response to new IR35 legislation and ensure they can bring in talent, when required, and retain an agile workforce.
By nature, Public sector organisations are known to be quite cautious and many have 'aired on the side of caution' when it comes to determining employment status and have attempted to move large numbers of Contractors and Interims ‘on-payroll’. Many Contractors and Interims have disagreed with how their employment status has been classified and where they have been offered permanent employment, the terms and pay have often been unacceptable. This resulted in many Interims / Contractors (from 2017 onward) moving from the Public to the Private sector where the reformed IR35 legislation had yet to be implemented. As the playing field levels and both the Private and Public sector work to the same legislation from April 2020, the solution Interim Managers had to circumvent IR35 by simply moving from Public to Private ceases to be an option.
It is hoped the coming months will see Private sector companies (including Food & Drink businesses) take a more pragmatic and detailed approach to determining employment status. However, should the Private sector decide it wants to be as cautious as the Public sector in determining employment status, this will result in many disagreements as Interims and Contractors push back against employment status decisions. In cases of disagreement, companies will have 45 days from the date of receiving notice of the disagreement to respond. During that time the company will continue to apply the rules in line with their original determination.
Such disagreements tend to be employment law, rather than tax law matters and, if unresolved, can result in costly litigation between parties. To alleviate the threat of disagreements and the potential for litigation, I would urge both Interim Managers and Private sector companies to be more flexible and less cautious than the Public sector has been in determining employment status. This will ensure important work is completed and deadlines continue to be met.
If Food businesses and other Private sector organisations apply pragmatism and flexibility, yet still conclude an Interim Manager to be of ‘employed’ status, they become responsible for deducting tax and National Insurance from their worker’s fees and paying it to HMRC. If an organisation believes an individual should be classed as an employee rather than an Interim, it is important the organisation immediately engages with the interim manager to find a mutually agreeable solution to continue the engagement. Various potential solutions exist, although costs for employers are likely to increase, as Interim Managers will legally expect to receive pay and benefits associated with employment including holiday leave, sick leave, pension, healthcare, company car etc.