IR35 – Why organisations need to take a different approach with their off-payroll workers

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For large global engineering companies, the flexibility a contingent workforce can provide allows them to quickly scale up their operations to meet work package demands.

Projects provide a great opportunity to engage local labour on a short-term basis and draw on the expertise of leading industry experts for key stages of each project.

With the extension of IR35 into the Private Sector from April 2021 however, many organisations are left with the challenge of continuing to engage off-payroll workers whilst remaining compliant.

Clearly defining processes

Off-payroll workers, whether they are managed through your recruitment agency’s contractor payroll, an Umbrella arrangement or their own Personal Service Company (PSC), need to be engaged in a different way to your directly employed workforce. Formal processes will be needed to meet legal requirements such as Agency Worker Regulations.

When organisations consider IR35 and their engagement of PSC contractors, this clear division of processes becomes even more important.

“HMRC will be looking to see that reasonable care has been taken when making IR35 status determinations. To demonstrate a clear understanding of the legislation, it’s crucial that organisations have specific processes for managing their off-payroll workers.”

– Richard Hanson, Linx Client Services Director

Developing IR35 compliant processes

How a contractor is engaged and how much direction and control is imposed, reflects the relationship that off-payroll worker has with the organisation. To fall Out of Scope of IR35, HMRC will expect to see that off-payroll contractor management is fundamentally different to directly engaged colleagues.

This focus looks at even the most basic of organisational processes such as booking time off for holidays. Directly engaged colleagues will have a formal process to request authorisation from their Line Manager. As a contingent worker is managed off your payroll however and is seen as independent from your organisation, they should not be expected to follow the same process. As an external contractor they should be either providing a service, or not providing a service – requiring no formal authorisation from your organisation to take leave. Practicalities around project deadlines and deliverables however can be factored into the contract particulars to ensure that work is delivered on schedule.

Annual leave is just one example of where off-payroll processes should differ from your own workforce. Whilst HMRC have said no one factor such as this will invoke an In Scope IR35 determination, they will be looking for evidence and formal processes to demonstrate that your organisation manages PSC contractors differently – understanding the key measures for IR35.