On April 6, 2021, an important rule went into effect after a year of delay due to the pandemic that almost certainly impacts your business. Unless you have fewer than 50 employees, you are now responsible for ensuring that all contractors who work for you are contractors—that is, truly independent workers—rather than employees in disguise.
It’s call IR35, and it’s just the latest salvo in the long-standing battle between governments who want to collect as much tax as possible from economic activities within their borders and employers (and individual workers) who want to pay the least.
The implications are enormous. Because of the new rule, there’s the possibility that some contractors will no longer work at corporations, yet the work will still need to get done. How? And there’s the tax bite. Should Her Majesty’s Revenues and Customs (HMRC) audit your workforce and re-classify contractors as “inside IR35”—that is, more employee than independent workers—you could be on the hook for back taxes, interest, and hefty penalties. Since HMRC can go back six years looking for non-compliance, you could be facing truly onerous payments of many thousands of pounds. And that’s per employee.
Complicating things further, the law is not crystal clear, with many experts pointing out that the language of the rule leaves many fuzzy areas. Indeed, IR35 reform is controversial precisely because businesses are inexperienced with making status decisions of this kind. And although any contractors that are re-categorized as employees will need to pay the higher taxes due, they won’t get the benefits that “real” employees do, such as sick days, holidays, or pension plans. Critics of IR35 say this is not fair.
Happily, there’s an answer. Although some aspects of the law are nebulous, enough is in focus so that by going down a checklist of salient points, you can probably avoid trouble and get the work done—with the help of Robotic Processing Automation (RPA).
Employee or contractor? The eternal question
In terms of classification, here is a list of the things HMRC will be looking for. The more documented evidence you have that your contractors meet these requirements, the less likely they’ll be deemed “inside IR35.”
- How they are paid: HMRC prefers that contractors are paid a fixed fee per project, as opposed to a fee based on their time, as most employees are paid.
- How much control they have: True contractors have the right to do the work as they, the supposed experts, deem best. They have control over when they work, where they work, and how they work. You cannot force them to work 9 am to 5 pm, for example, or to show up for company meetings.
- Whether they can send a replacement: Legitimate contractors have the “right to substitute,” that is, they can send another, equivalent worker in their place without being penalized. This is one of the biggest differentiators between employees and contractors.
- If they own their equipment: Contractors should have their own tools of the trade, whatever those happen to be. You should not supply them with company laptops, mobile phones, cars, or other physical equipment to do their jobs.
- Whether they have other clients: You should not be a contractor’s only customers. They should be able to prove they have other, either concurrent or serial, customers in addition to you.
- Whether they operate as an independent business: Your contractors should have the usual accouterments of a business: their own premises, advertising campaigns, stationery, business cards, insurance, and more.
- Whether they can be terminated without cause: A contractor can be let go “at-will”—for any reason. They don’t have to meet specific conditions for termination, unlike employees.
And there is a slew of little things that auditors look for. For example, are contractors invited to the Christmas party? Do they work on the employer premises? Even taking a contractor out for lunch too often times might be an omission that they’re within IR35.
A foundational way to “prove” these conditions are met is to write up a formal contract that contains appropriate language. And here is where automation comes into play. By putting into place standardized, replicable processes for contract management, among other things, you can protect your business against IR35 violations.
Ways automation can help with classification
The first and most important step you should take is to perform a wholesale audit of your existing contracts.
By building bots that search through documents for specific keywords and key phrases, you can determine if you are at risk of non-compliance—either if a certain kind of language is missing from the contract or if problematic language exists in it. RPA software bots can flag contracts for either missing required phrasing or for containing potentially risky text, reducing dozens—or possibly hundreds—of dreary manual person-hours to minutes.
Bots can also be created for IR35 reporting. They can send out emails to line managers, making sure they are making sure their contracts are fit for purpose. Bots can also track that managers have gone through required training on IR35—and can report back to HR or the legal department when people have failed to complete a required course.
A similar RPA process could help when onboarding new contractors. A bot could monitor a checklist that everything has been said and done that is required to be in compliance. And then you have an audit trail, ready for HMRC.
We recommend that your contract management or legal teams create new contracts that use the very specific language that is spelled out in IR35. “Right to substitute” should be in all contracts, for example, as well as any other phrases deemed utterly essential.
Bots can also be used for version control. For example, whenever a new contract is published, a bot can cross-reference it against the latest version from legal to ensure that it is up to date. This will prevent your line managers from using older, perhaps non-compliant, contracts that they’ve stored on their local drive.
Using RPA for quality control—and peace of mind
Because IR35 reform is so new—and the language is imprecise—no one is quite sure what to expect or what will be required. It may well be that you will have to adhere to formal reporting rules to HMRC. For example, you may need to submit an annual report of how many contractors you have on your books and of the conditions of their relationship with you. In such a case, having all these RPA processes in place would make reporting a breeze.
At the very least, using RPA for rigorous auditing and quality control of contracts and of related processes will give you much greater peace of mind as IR35 is more universally enforced.
Employing automation for work
With some businesses forced to consider moving away from contractors, the question arises, as mentioned earlier, how will the work get done?
RPA can automate and streamline many processes. It can save time and effort and free up staff from repetitive manual tasks to focus on higher-value projects.
You have enough stress in your business, including dealing with IR35. Automation offers relief.