Can you ensure that hiring contractors remains cost-effective after IR35?
16th Dec 2019
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For many years, hiring contractors has been key for finance directors who are looking to cut costs while also recruiting as much talent as possible. With many finance directors priding themselves on skills of cost reduction and boosting profits, it’s easy to see why there are around 1.77 million full-time contract workers in the UK.
A change to the law is coming, however, and many finance directors are likely to find themselves wondering whether or not they will remain compliant once the law has changed. This article will explain what the main changes are going to be and will also explore some ways to ensure that hiring contractors can continue to be cost-effective in the future.
How is the law changing?
Putting workers on payroll is not the only option: many businesses choose to hire people as self-employed individuals and pay them what would otherwise be their salary in what is essentially a business-to-business transaction. For a long time, it was preferable for many mid to high earners to be paid as contractors – both for the individual worker and for the employer. The individual was able to charge higher fees and reduce their tax bill through expense claims, and the employer was not burdened with National Insurance contributions, auto-enrolment pension fees and more.
However, the Exchequer has realised that the only loser in the equation is the taxpayer and is now cracking down on what it describes as “disguised workers” under a law known as IR35. Soon, the law will mean that private sector companies will have to ensure they determine their contractors’ status accurately – and also communicate it to the contractor.
How can FDs keep their cost-effective contractor structure?
First things first: the only way to remain compliant is to follow the law, and that means financial directors will need to do their research to ensure they comply. The penalties for not following the law are severe as they can include both a repayment of all owed tax and National Insurance contributions, plus a proportional penalty. It’s important not to panic, though. Firstly, the FD should check that their contractors are actually disguised workers rather than legitimate contractors, who are not affected by the changes.
There are several metrics available here. Her Majesty’s Revenue and Customs, or HMRC, has produced a handy tool called CEST to help an FD work out whether their employees are disguised or not, and it looks at a variety of possible indicators such as whether or not there is a limited company in play, whether a substitute can be provided to do the work and so on. According to figures from ContractorCalculator, 54% of cases that are run through the CEST tool actually pass, so there’s a good chance a firm isn’t necessarily in contravention of the law.
There are also some other ways in which finance directors can keep their cost-efficient contractor structure. Starting early is key. For those who operate a largely contractor-based workforce, it may be worth opening negotiations now rather than in 2020. In some cases where a contractor fails the CEST test, the firm might have to think about moving contractors on to payroll and negotiating a salary with them. If they leave, the firm will need to do this anyway, so it could be worth saving the re-hiring costs.
It is also worth thinking carefully about worst-case scenarios and protecting against them. An article in Personnel Today has suggested that some firms are thinking of taking out comprehensive liability insurance to protect themselves in case of a claim against them from HMRC, although there is no indication of how widespread this move is.
Hiring contractors is something that most finance directors have considered doing from time to time – and many have actually taken the plunge and taken some on. It has led to all kinds of benefits for the firms they represent, including lower employment overheads. With changes to the IR35 law on the horizon, though, now is the time to ensure that compliance is at the top of the agenda.