Is your business prepared for new tax avoidance rules for contract workers?

With updated legislation designed to combat tax avoidance by freelance workers in the private sector coming into effect from April 2020, it’s vital businesses ensure they have the right processes in place to avoid falling foul of HM Revenue & Customs (HMRC). Since 2008, the ‘gig’ economy has continued to boom as businesses look to adopt more flexible workforces to cost effectively manage peaks in activity. The number of freelancers in the UK rose by 18% in 2018 alone and there are now an estimated two million off-payroll workers operating across the country. Therefore, it’s likely many private companies across all sectors will be impacted by the new regulations. More commonly known as IR35, the ‘Off-Payroll Workers’ (OPW) rules were initially introduced in 2000. The aim was to prevent freelance or contract workers providing services through their own limited company but in reality acting like an employee, therefore not paying the same National Insurance (NI) contributions on their earnings as a permanent employee would. The legislation also stops organisations paying people in the same way they would a freelancer to avoid employers’ NI contributions or the need to provide employment benefits such as pensions, holiday or sick pay. IR35 initially placed responsibility on the worker to determine their employment status but following concerns from HMRC that only a small percentage were complying, in April 2017 the regulations changed for the public sector and the onus shifted to the employer.

From April 2020, the same rule will be applied to all medium and large organisations in the private sector and, based on lessons learned across the public sector, it is vital for employers to prepare now, well ahead of the deadline. When IR35 changed for the public sector, organisations were given just four months to prepare. To overcome uncertainty, some adopted a blanket approach and included all contract workers on their payroll. However, this tactic can significantly increase the bottom line - the additional cost of Employer’s Class 1 NI and Apprenticeship Levy contributions per employee is 14.3%. It can also reduce the talent pool available to businesses as in demand freelancers may refuse to work for organisations that insist on applying PAYE to their income and reduce their take home pay. In addition, HMRC does not consider this approach as taking ‘reasonable care’. Thankfully, private sector businesses have been given longer to adapt but the clock is still ticking to establish the necessary processes and controls. Leaving it too late could be costly and put companies at risk of investigation by HMRC and subsequent financial penalties. HMRC has introduced an online tool to help organisations determine the employment status of workers but this has come under fire for its limitations and has been found unreliable at employment tribunals. To combat this, at Grant Thornton we have developed our own status assessment platform to support businesses with the IR35 challenge. This tool uses artificial intelligence to provide assessments that are more consistent and reliable. It also produces a clear audit trail and a database that provides an overview of all freelance workers within a business at any one time, so employers can assess the cost-benefit of its OPW population.

Bethan Gill Associate Director at Grant Thornton
Bethan Gill Associate Director at Grant Thornton