The IR35 Regulation and how SecZetta Can Help
On April 6th 2021, payroll regulation IR35 will take effect in the UK bringing with it changes to the way “off-payroll” (contractors) are taxed by the HM Revenue and Customs (HMRC) and how they will need to be categorized by HR payroll systems. The changes, explained below, will apply to all payments made for services provided on April 6th, 2021 and after and will place a costly and labor-intensive burden on organizations.
The rule is an anti-avoidance mechanism which states that off-payroll workers (the term used by HMRC for a contractor/vendor who provides a service to an end-client without getting compensated through the client’s payroll system) who perform similar work as regular full-time employees are subject to Pay As You Earn income tax (PAYE) regulations and National Insurance (NIC). PAYE regulations require that third-party contractors are paid directly and pay tax as they earn. The client is the organization who receives the services of a contractor and they are also known as an End-client. The regulation dictates that the End-client will now determine the employment status of the contractor, their LLC, or Personal Service Company (PSC). The table below highlights the assessment responsibility:
|End-client type||Who assesses the worker’s employment status||Who deducts PAYE / NICs||When from|
|Public sector||end-client||Fee payer||6 April 2017|
|Large or medium-sized private sector||end-client||Fee payer||6 April 2021|
|Large or medium private sector (IR35)||PSC||PSC||Until 5 April 2021|
|Small private sector (IR35)||PSC||PSC||Ongoing|
There are numerous other work-provided labor chain scenarios such as:
- Worker > PSC > Agency > End-Client
- Worker > PSC > Agency > Agency > Intermediary > End-Client
- Worker > PSC > End-Client
Regardless of the scenario, it is now always the responsibility of the End-Client to assess employment status and pass on that assessment to a contractor’s payroll agency or deduct the PAYE and NIC from the fee they pay to the contractors themselves. The concern to an organization’s HR department is: if the End-Client or any other party in the chain does not categorize the contractor (based upon the HMRC’s Check Employment Status Tool) and pass on their employment status to the agency, intermediary or worker, the End-Client will be held responsible and be subject to penalties.
Additional Burden and Compliance Concerns for HR departments
Numerous other scenarios are stipulating when the IR35 regulation is applied, or not applied, all of which places a time-consuming and costly burden on HR departments and organizations.
HR and Organizational Risk Concerns:
- When off-payroll working applies, the client in the labor supply chain must assess the employment status and they (or a different party) have to deduct PAYE and National Insurance from the compensation paid to the worker’s company or the individual.
- To avoid potential PAYNE non-compliance issues End-Clients may just categorize all workers (contractors) as full-time employees which exposes the organization up to a slew of misclassification liabilities
- Organizations usually let department managers hire contractors out of their budgets (e.g.: a whitepaper writer for marketing, a specialized developer for a dev-op project) but by incorporating contractors as full-time employees budgeting becomes immensely complicated.
- The extra burden, inefficiency, time-consuming, and heavy expenses of onboarding, managing the lifecycle, and offboarding a contractor who will only be used for a short time.
How SecZetta Can Enable IR35 and PAYE Compliance
SecZetta’s Third-Party Identity Risk solution was purpose-built to efficiently mitigate the risk of regulations like these and to manage the lifecycles, classifications, and risk of contractors and freelance off-payroll workers along with all types of non-employees such as vendors, affiliates, students, interns, and more. SecZetta can integrate with an organization’s existing HRMS, VMS, and IGA systems to address the off-payroll /non-employee compliance and lifecycle management gaps that these systems lack.
One of the rules of IR35 stipulates that “clients cannot apply a blanket status assessment across all contractors”. It states “Applying a decision to a group of off-payroll workers with the same role, working practices, and contractual terms may be permissible in some circumstances, but it is not right to rule all engagements to be inside or outside of the rules irrespective of the contractual terms and actual working arrangements.” Since off-payroll workers‘ information must be collected collaboratively, usually from disparate sources inside and outside of the organization, these types of rules will be very error–prone and time–consuming.
Organizations and HR departments will be tempted to move contractors to their HRMS platforms, but those systems were just not designed to manage the information for off-payroll employees and their placement there may lead to compliance and legal issues.
There are various other issues of adding off-payroll workers in HRMS systems:
- HR systems require heavy customization to support a diverse range of off-payroll workers which adds to lengthy implementation times and a high cost per identity
- HR systems cannot manage multiple, complex relationships encountered with off-payroll populations
- HR teams must scale to accommodate the management of additional people
- HR systems are not able to easily add audit attributes
- Placing non-employee data in an HRMS system conflicts with the US’s IRS and other country–specific regulations
- When off-payroll workers are placed in an HRMS it may appear that they have been classified as a full-time employee according to the organization. This may prove to be very detrimental if legal issues arise since there have been lawsuits filed by contractors whose judgments were decided on what type of employee system they were placed in.
SecZetta’s Third-Party Identity Risk solution addresses those issues and gaps and can complement your existing HRMS platform. SecZetta can:
- Create a single source of authoritative data of third parties of all types to avoid misclassification
- Allow a user to easily add regulation checkboxes and assign statuses
- Automate time-consuming and costly manual processes with customizable workflows
- Reduce the risk and costs associated with misclassification of employees and co-employment violations
- Enable internal and external resources to input information needed for off-payroll workers through easy-to-use collaboration hubs
- Speed time to value for new off-payroll workers with accurate and efficient provisioning
- Streamline audit creation
- Integrate with HRMS, VMS, IAM, and IGA systems via APIs
SecZetta features drag-and-drop capabilities and the intuitive dashboard is designed to be similar to a HR system layout so no special training is required to set up employment type status checkboxes or workflows with internal and external parties.
To see how SecZetta can mitigate the risk of non-compliance issues with regulations such as IR35 ask for a demo today.