What is IR35?
IR35 is the UK’s regulatory version of proper classification for Independent Contractors (resembling regulations around using 1099s vs W2s here in the US). Essentially, the IR35 defined is a piece of legislation that allows HMRC (HM Revenue and Customs) to collect additional payment where a contractor is an employee in all but name.
Private Sector Amendment Effective April 2020
The law expands to include the private sector effective as of April 2020, so companies doing business in the UK need to start thinking about how they will manage this population and stay compliant.
If they choose to work with PSC’s (Personal Service Companies), the new regulations put more responsibility on the client to classify the worker correctly and pay taxes. In the UK, this is the loose equivalent to a 1099 worker.
For UK clients who use PSC’s, the client would have to classify the worker correctly. If they discover during that classification that the worker is doing a job that qualifies them as an “employee,” the client would then be responsible for paying their social taxes to the UK government. This is a shift from the previous regulations, which placed the responsibility for tax obligation on the PSC, not the client.
IR35 & Client Mitigation Strategies
To help mitigate the risk posed by the new regulations, clients can consider any of the three strategies below.
Like in the United States, one optional policy is to avoid PSC’s (Independent, self-employed workers) altogether. Suppose the worker is a PAYE employee of the agency you hire them through. In that case, the agency is responsible for paying all their employment taxes, and the client has no additional obligations.
#2. Umbrella Company
Use an “umbrella company” (a version of a payroll company) for sitting between the client and the PSC and covering all the necessary employer tax obligations. This can be a pricey option as it raises the workers’ rates by at least 15% unless you can get the worker to take a pay cut to cover the difference.
#3. Build a Compliance Process
Establish a system & process for conducting internal assessments on all PSC’s in the organization to help properly classify them and take appropriate action on any that fall under the new regulations. This would need to be established and conducted on all active workers & implemented as a new process for all new workers hired going forward. This is something you can partner with your MSP on to help design an efficient process towards proper classification and leverage features within your VMS to help automate and streamline.
All clients doing business in the UK should seriously consider taking immediate action to understand the current worker population better and determine the best course of action.
Monument Consulting: A Highly Rated MSP with Vendor Management System Implementation
Although you have the internal staff to run a vendor management system independently, you may lack the configuration knowledge and best practices to choose and implement your VMS. However, consider partnering with our team of managed service providers (MSPs) at Monument Consulting to guide you and help implement the VMS on your behalf to hand it over for you to manage internally.
At Monument Consulting, we understand the importance of managing your contingent workforce in the most optimized and efficient manner. Therefore, our team uses vendor management systems to streamline our managed service provider services.
Additionally, we offer contingent workforce management consulting services to share our expertise with your staff on how to operate your contingent workforce at maximum efficiency. Our team at Monument will train your team on working with a VMS and help with your configuration evaluation, system integrations, and VMS enhancements to tailor the program to your industry.
Are you looking to connect with Monument Consulting? Contact us today to ask about our contingent workforce consulting or managed service provider (MSP) services!
By Ashlee Gagstetter, VP Strategic Delivery