71% determined IR35 tax status of contractors via individual assessment

Research by Brookson Legal has found that UK businesses using contractors and freelancers plan to review their IR35 solution before HMRC transitions to enforce the new ‘off payroll working rules’ introduced in April 2021.

According to the research, when asked in Q4 2021, 25% of medium to large businesses now responsible for the IR35 compliance of their contractors had already reviewed their solution with 31% planning to do so before January 2022 and 27% planning a review before April 2022. With HMRC transitioning from its education phase to enforcement of the new legislation, these findings demonstrate the diligent approach the majority of organisations are taking to ensure compliance.

However, 17% of businesses will not be reviewing their solution before April, 4% of which do not have an IR35 solution in place. This is concerning, particularly when considering the approaches that some businesses have taken to IR35. While 71% determined IR35 tax status of contractors via individual assessment on a contractor-by-contractor basis, 41% are also using role-based assessments and 25% have applied a blanket decision across their whole workforce or subsets of the workforce.

Matt Fryer, Head of Legal Services at Brookson Legal, the only Solicitors Regulation Authority accredited IR35 specialist law firm, commented: “April marks the next milestone in the IR35 journey for the private sector, with HMRC moving into enforcement and beginning to investigate compliance.

“For all organisations – whether they believe they are compliant or not – this is an essential opportunity to review their IR35 solution and ensure it not only meets HMRC’s threshold for reasonable care but, crucially, that it meets the needs of the business and supports its growth. This will enable businesses to truly access the benefits of the flexible workforce and the agility it offers.”

The end of HMRC’s soft-landing coincides with plans by 90% of companies to extend their use of contractors over the next 12 months to support business growth.

This is particularly important as 29% of businesses surveyed said their approach to IR35 was an interim solution which would be replaced in the near future. Comparatively, 25% said their solution has been designed to evolve in line with their business, while 45% said they view their approach as a fixed solution which will be retained.

Matt Fryer added: “For ongoing compliance, regular reviews of contractor status determinations should be undertaken in line with reasonable care obligations.

“Users of HMRC’s Check Employment Status Test (CEST) should also use this milestone to consider their use of the tool. A recent review of the new legislation by the National Audit Office found that CEST requires further refinement and additional user guidance. Organisations which use the tool should review their contractor status determinations as a priority.

“Once we are over the teething problems for the new rules and end hirers have embedded IR35 practices as business as usual, they should provide an effective framework for accessing the benefits of a flexible workforce. For this reason, it’s important for businesses to use the end of the soft-landing period as a welcome period of reflection; to review their solution and implement a robust approach that can realise the flexibility and agility IR35 can deliver.”