Navigating IR35 compliance to safeguard your business

This article follows on from the previous post – Essential tips to ensure IR35 compliance.

Since its roll-out in 2021, IR35 has become a crucial factor for businesses in the private sector. As HM Revenue & Customs (HMRC) proactively scrutinises off-payroll working regulations, organisations must prioritise their efforts to ensure compliance. Preparing for potential HMRC assessments is paramount to meeting IR35 requirements and safeguarding business operations.

Determining the client

To comply with off-payroll working regulations, it is crucial for organisations to have a clear understanding of contracted out services and determine who the client is according to HMRC.

This involves assessing operational processes and comparing them to any contractual arrangements. The organisation issuing a contract should not have control over who is engaged to deliver the service or how these individuals are contracted. If the organisation maintains control over hiring arrangements, it signifies that the commercial relationship is not a contracted out service. In this case, the organisation will be considered the client by HMRC for off-payroll working rules, regardless of how the contract is labelled.

Statement of works

When managing external supplier arrangements, it is common to use a statement of work document. This document outlines how the work will be performed, including milestones and deliverables, but it should be noted that a statement of work does not constitute a contract.

The details within the statement of work play a crucial role in determining whether the services are indeed being delivered through a legitimate contracted out service. However, it is important to note that simply having a contractual agreement does not automatically exempt the services from the off-payroll working rules.

Status determination statements

In order to ensure compliance with IR35 regulations, organisations must have robust procedures in place for making status determinations and the individual responsible for making the final decision on each worker’s IR35 status must have a comprehensive understanding of the specific arrangements. This could involve designating one person within the organisation to make the ultimate decision or employing a team consisting of hiring managers, legal, procurement, and HR representatives to approve status determinations.

Making a status determination requires taking into account a range of information, and HMRC places great emphasis on consistency when reviewing a business’ IR35 practices. A business may choose to use decision-making tools to assist with making status determinations. These can provide clear evidence of the determination decision but rely on accurate information input. While it is not mandatory to use HMRC’s decision tool, Check Employment Status for Tax (CEST), it is the only tool HMRC will support when the information used is correct.

Organisations have a responsibility to ensure ongoing accuracy of status determinations and should conduct reassessments when they believe significant changes have occurred that may affect the original determination, so it is best practice to plan regular reviews, issue new status determination statements for individual assignments that have changed, and confirm that workers engaged based on role-based determinations still align with grouped working practices.

Disagreement process

Organisations issuing status determination statements must establish a transparent process to manage disputes, which may be raised by workers or their recognised employers.

Valid disputes must include the specific grounds for challenging the determination, aligning with the indicators of employment status. Disagreements submitted without providing a rationale may be rejected. However, disagreements accompanied by reasons must be investigated before rejecting them.

When handling disputes, it is imperative to carefully consider the arguments presented, respond within 45 calendar days of receiving the dispute, and continue applying the tax arrangements based on the existing determination. In cases where assignments fall within the determined scope, tax deductions should still be implemented while the dispute is under review.

Outsourcing off-payroll working responsibilities

Organisations have the option to outsource off-payroll working responsibilities to a third party, which can ensure impartial and transparent implementation. This can be an excellent alternative for organisations without the internal skills and expertise necessary to navigate IR35 regulations.

However, even when organisations outsource IR35 they are still responsible for:

• Accurately identifying off-payroll workers who fall within the scope of the regulations
• Producing informed status determination statements for these workers
• Issuing the determination statement to all parties involved in the supply chain
• Implementing compliant PAYE operations when they are deemed employers

Internal auditing

Regular reviews of your organisation’s off-payroll working activities and adherence to IR35 rules are crucial. Conducting periodic internal audits ensures consistent processes and accurate status determination statements, allowing for necessary adjustments to be made and effectively communicated within your business. To ensure an independent and comprehensive review, organisations may choose to engage a specialist consultancy partner to establish the internal auditing process and collect the necessary information for the audits.

Supporting organisations with IR35 compliance

At Linx, our team of experts specialises in helping businesses achieve and maintain compliance with IR35 regulations. We offer comprehensive services to ensure organisations meet the best practice guidelines advised by HMRC, designing and delivering bespoke training programmes to ensure consistent understanding and implementation of IR35 processes throughout your hiring community.

If you’re interested in acquiring a better understanding of the legislation and how your business can respond to its requirements, take a look at our free whitepaper on ensuring IR35 compliance for your organisation, and feel free to connect or reach out to Richard Hanson if you’d like to discuss your needs further.