How the Mini-Budget Changes to IR35 Impacts Human Resources

The most recent raft of regulatory reforms announced by the latest appointee to the UK chancellor’s office, Kwasi Kwarten, has ushered in changes that Human Resources teams and organisations more widely will need to respond to.

Previous private sector IR35 changes delayed from 2020 due to the Coronavirus pandemic, saw new ‘off pay-roll’ working rules being brought into effect in April this year. The impact of the rule change saw a shifting onus of tax rule compliance, moving away from the contractor to the employer.

Half of contractors yet to have tax status assessed ahead of IR35 changes, report finds

This change resulted in HR teams being made responsible for the IR35 assessments put in place for contracted workers. As such it was vital that HR knew about any legacy issues with contractors operating in a similar way to those employed by the organisation. In addition, liaising and communicating with contractors, and liaising with separate departments if they were responsible for conducting IR35 assessments.

What is IR35 ?

IR35 was a piece of anti tax-avoidance legislation introduced initially in 2020. Its aim was to legally define the characteristics of a contractor and their employment terms. Furthemore, it aimed to identify and distinguish contractors who could be in many ways, be considered as employees, operating somewhat distinctly from the organisation, via their own ltd company, as opposed to being on an employer’s payroll. This status was also referred to as being ‘deemed employees’.

Why was the change brought in? 

Prior to the introduction of IR35, contractors who for all intents and purposes were employees but contracting through their own Ltd company, were able to avoid certain tax and National Insurance payments. Yet despite their operations being much the same as an employed individual, these contractors weren’t able to access employee benefits and receive the same employment rights that actual employees had access to. Such as statutory sick pay and statutory holidays.

What changes have now taken place? 

The IR35 rules and their stipulations still exist. However the latest changes introduced by the new chancellor of the exchequer Kwasi Kwarten. Mean that once again the onus to comply with these regulations once again falls to the contractor. The result will be that contractors are again responsible for compliance and the payment of tax, as opposed to the employer. 

In real terms, this change will relieve HR teams from some of the onerous bureaucracy that was introduced for organisations when the initial introduction of IR35 rules took place. 

What changes will occur now in HR teams? 

HR teams will now be able to peel back the responsibility sitting with them in the organisation to ensure that contractors were evaluated in line with IR35’ requirements.

This further removes the risk of when mistakes are made with IR35 evaluations of contractors, resulting in HMRC then making a request to the business for tax and National Insurance that should have been paid. 

Furthermore penalties being received from HMRC for inaccurate reporting on contractors can now be reduced. 

Contractors who were switched to become employees 

Many organisations tackled the issue of IR35 by switching their contractors to become employees, placing them onto the payroll system whilst retaining their higher contractor rates. 

Whilst this presented a swift and effective solution to encountering the challenges presented by the legislation, the latest change may result in those who contracted previously, expressing a desire to resume their former contract arrangements. 

HR, therefore, needs to be prepared to define a standard in relation to this. What is the organisation’s preference and how can consistency be deployed amongst current and future contractor workers? 

HR Systems updates 

Setting up your HR Management systems to accurately capture employees and contractors is essential. Sage HR’s record keeping and core HR management makes matters such as headcount reporting and resource budget management straightforward and effective for HR teams to manage easily. 

Stakeholder management & communication 

It’s important to acknowledge that every department across the organisation will need to receive communications from Human Resources about the latest change to this piece of legislation. Critically every departmental head and manager will benefit from having an understanding of how this change could impact the preferences of those who were formerly consultants and contractors switched onto payroll. Whilst also planning for how future hiring rounds and needs gaps in the organisation will be conducted and filled with the enhanced option of engaging contractors without quite the same administrative burden. 

Be prepared for some frustrations  

Somewhat inevitably there may be managers and former contractors who choose to express their frustrations at this latest change. 

Equally HR itself may be frustrated by a reversal to what would previously have involved months of work, system, process, contractual and payroll change to respond to the legislative changes introduced in April this year. 

If this response is encountered, it’s helpful to acknowledge that this is a wholly understandable response in the face of experiencing change. 

Whilst for many these changes will be a welcome respite to those that were introduced and rolled out in April, some contractors may prefer to press ahead with reverting back to their former contractor status and this is simply something that HR may need to be prepared for. 

Have an awareness of other changes that are being brought in 

The planned increase to National Insurance will now also undergo change, by being abolished from 6 November. The result will be a change to those employed and employees alike. 

The reversal of the 1.25 per cent increase in national insurance (NI), will be a material change to employees, but also to employers who will need to make this amendment through their payroll processes. 

Furthermore, there are, following the UK’s exit from the EU, planned changes that will result in the removal of EU laws. As a result, it is anticipated that new guidance from the government is expected to clarify changes to how current UK employment law will be impacted and will subsequently change. 

In real terms, this means that government departments are set to review, followed by retaining or replacing what the UK has in place for EU-derived law. For those laws that are not ratified and formally retained by the UK government, will expire automatically on 31 December 2023. 

Bringing it all together 

Much with any change in the organisation, it’s vital that HR can remain responsive, agile and to a larger extent ahead of the curve with changes as they occur. Having an awareness of the fact that continued changes are likely to occur further down the track and being ready for them, will serve HR well in the months ahead. 

Sage HR helps HR leaders, teams and employees of small to mid sized organisations respond to the changes that unfold in business and people management in real time. Get started with Sage HR free today.

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