One of the main challenges of IR35 & off-payroll working is that many parties involved in hiring contractors are still unaware of how it affects them. The legislation’s complexity can lead to businesses unnecessarily putting themselves at risk.

A robust IR35 compliance process is crucial for HR professionals to ensure adherence to tax regulations and avoid unexpected tax liabilities.

Do you need to consider off-payroll working?

“IR35” was first introduced as the Intermediaries Legislation in 2000 and aimed to combat tax avoidance by workers and firms, where the worker provides services via an intermediary (typically a limited company) but where the relationship, if engaged directly, would be one of employment. Contractors were liable for assessing their engagements and paying taxes if IR35 applied.

The original legislation largely failed, leading to new legislation called “Off-payroll” being introduced in 2017, which applied to public sector organisations. The government then extended it in 2021 to medium-sized and large firms in the private sector. The off-payroll rules switched the liability for assessing engagements and the taxes from the contractors to the firms. For small companies in the private sector, the original IR35 rules still apply, with the contractor being responsible for determining their employment status.

Whilst the new legislation is called off-payroll working (“OPW”), the term “IR35” is still commonly used, confusingly referring to both sets of legislation.

Where your organisation is medium or large and engages individuals who provide services through an intermediary, you must implement compliance processes for off-payroll workers.

Here’s how to do it in six steps:

Step 1: Educate yourself and key stakeholders

Research the relevant legislation and the current, up-to-date guidance. You can also find helpful articles and webinars from firms specialising in IR35/off-payroll matters.

Organise training sessions for your HR team, finance department, senior management and hiring managers to ensure everyone involved understands how IR35 may affect your organisation.

Make sure to collate relevant material based on case law and statute. Set up a centrally available folder so you and your team can access key documents easily.

Step 2: Audit your workforce

Identify all contractors and freelancers within your organisation. Work with payroll and HR to list all your “contingent workforce”, including those paid via third parties. Check accounts payable for any contractors not tracked through payroll systems.

Review existing contractual agreements (including via third parties) and working practices. Ensure that clauses in your contractors address key IR35 issues such as substitution, control and mutuality of obligation. Engaging an IR35-savvy professional to review your contractors is strongly advised, as many generalist practitioners can be unaware of potential pitfalls.

Ensure that the work contractors and freelancers do matches the contract terms.

Step 3: Develop a robust assessment process

Use a reliable tool for determining the IR35 status of your employees, contractors and freelancers.

Ensure the process is documented and consistently applied to cover key IR35 indicators like control, substitution rights and mutuality of obligation. Document each assessment’s rational and contractual evidence, review the process regularly, and reassess them when contracts or working conditions change.

As part of this process, include measures for dispute resolution, outlining steps for contractors to raise concerns and the timeline for resolving disputes. If your assessment system doesn’t handle disputes, assign a responsible team or individual to handle and manage them.

Step 4: Update policies and procedures

Revise your recruitment processes to account for IR35 considerations. Include an indicative IR35 status in your job adverts to set clear expectations for contractors and freelancers. Integrate an IR35 assessment into your recruitment process to understand the likely status before signing contracts. Train your hiring managers to recognise potential IR35 compliance risks.

Develop new procedures when engaging contractors to ensure you understand their IR35 status. Create an onboarding checklist covering IR35 assessments, contract reviews, and documentation. Ensure HR or legal teams review all new contracts for IR35 compliance, even for third-party engagements. Always keep detailed records of contractor deliverables and payments to align with their IR35 status.

Create guidelines for ongoing monitoring and status reassessment of workers. Establish regular IR35 status reviews to ensure that the scope of work or conditions have not changed; if they have, you will need to assess their status again. Document any amendments to contracts or practices that could affect status. Assign responsibility for monitoring and reassessment to ensure consistency.

Step 5: Establish ongoing compliance measures

Set up regular audits of contractor engagements, keeping an eye on any changes to the rules. Regularly review contractor engagements to capture contract changes and working conditions that might affect IR35 status. Some compliance tools will automate ongoing audits and flag potential issues. Involve HR, legal and finance teams and keep detailed records to address necessary actions before the following review.

It is also essential to implement annual IR35 compliance training throughout the business. Develop a training programme for relevant staff, including HR, finance, legal and hiring managers. Keep records of specific training and update regularly to ensure legislation changes are reflected.

Step 6: Prepare for future HMRC compliance checks

Independently audit your compliance process annually. Gather feedback from your auditor and your team to identify areas for improvement and implement any recommendations.

Consider specific tax defence investigation policies if you lack in-house expertise or resources to cover a time-consuming HMRC compliance check.

Ongoing process

Off-payroll compliance is ongoing, and working practices must continue to reflect the written contract. Regularly monitoring the status of contractors is vital. It is not a one-time task and requires continuous attention to get right.