Managing IR35 compliance in the engineering sector 

To effectively manage a wide portfolio of engineering projects, the sector heavily relies on contingent workers which comes with its own challenge of ensuring key legislation such as IR35 is managed compliantly. 

Understanding IR35 in the engineering sector 

For those not up to speed, IR35 is HMRC’s off-payroll working legislation that was initially rolled out to the public sector, before being extended to the private sector in recent years. 

Put simply, it was devised to tackle tax avoidance practices, providing clear differentiation on what constitutes off-payroll working through a Personal Service Company (PSC), and what indicates deemed employment. Deemed employment is HMRC’s term for a contingent worker operating through a PSC who’s working practices are too similar to directly-hired personnel, deeming them employed for the purpose of tax and National Insurance deductions. Those contingent workers who fall out of scope of IR35, are responsible for managing their own tax implications through their PSC. 

What does this mean for engineering companies? 

When IR35 was first extended to the private sector there was lots of talk of reducing the talent pool, because it would deter candidates from opting to work as external contractors.  

There are several key things to remember however: 

• IR35 only applies to contingent workers engaged through Personal Service Companies, Pay As You Earn and Umbrella contractors are not required to adhere to IR35 

• IR35 assessments, known as Status Determination Statements, need to be completed for each assignment, to determine if the off-payroll working rules apply – not all assignment may be in scope 

• Where Status Determination Statements indicate the assignment is in scope, the contingent worker can still operate through their PSC by opting for deemed payments to manage their tax and National Insurance implications 

• The working practices and remit the contingent worker will have to complete the work, will play a significant factor in their IR35 status determination 

What’s clear to see since the private sector implementation is that where niche and specialist skills are required that engineering companies do not have in-house, the engagement of PSC contingent workers is still paramount to project delivery. However, their working practices need to evidence that they are working externally to the client they are delivering the work to, and they must be given the responsibility and remit to complete the work without unnecessary direction, supervision or control. Without a detailed understanding of how IR35 is assessed, engineering companies risk losing access to the crucial specialist skills they need. 

Managing the risks of IR35 non-compliance 

Done correctly, engineering companies shouldn’t see IR35 as an administrative burden, provided they have the right support in place to help them manage compliance. 

Internal audits can help to identify any high-risk areas, as well as undertaking a review of contractual arrangements with agencies to ensure processes remain in line with your company’s IR35 strategy. Evaluation of existing IR35 training for staff can also help to identify any areas of concern that need to be addressed, whilst checking training follows the latest IR35 insight from HMRC. 

Our experts have extensive knowledge of IR35 in the engineering sector, teamed with insight on how best to manage the off-payroll working rules in large organisations with multiple recruitment suppliers. They operate as the single point of contact to manage IR35 compliance, reviewing internal processes to ensure they will stand up to scrutiny, whilst ensuring adequate training is given to key stakeholders involved in status determinations. How adept the recruitment supply chain is when managing in and out of scope decisions also plays a crucial role in IR35 compliance, which is why our team extends their support to suppliers as well as internal stakeholders. 

Retaining access to specialist skills 

A company’s approach to IR35 needs to carefully balance the need to adhere to HMRC’s off-payroll working rules and mitigate risk, whilst ensuring access to the skills needed to win and deliver engineering projects. 

When HMRC first announced that IR35 would be extended to the private sector, some businesses took a blanket decision to stop using Personal Services Companies. It was a stance that removed the risk of non-compliance but also drastically reduced their access to skills and specialist talent.  

Our Linx team works with companies to understand their contracting requirements, to ensure the best engagement solution is put in place to secure the right talent needed. This includes the use of Statement of Work models to secure skills on a project deliverables basis, with a clear contract in place to indicate milestones and payments.