Guest comment: IR35 - How companies can assess and address pensions risk

The latest government review of IR35 was announced on 7 January. It suggests that the IR35 changes will proceed on 6th April without major changes to the original proposed amendments.

The pension implications of the new rules are gradually being recognised as a significant risk for businesses, particularly those with large off-payroll workforces.

Designed by HMRC to stop companies and workers from erroneously making lower tax payments through personal service companies than they would in direct employment relationships, the IR35 changes are expected to have a considerable knock-on effect on employment and pensions obligations, as well as tax.

For workers previously classed as contractors, but which are now regarded as employees for IR35 purposes, it is important that companies consider the status of these workers to determine what, if any, backdated payments are owed to those individuals.

A complicating factor is that an individual's status is not automatically the same for IR35 purposes as it is for employment and pension purposes.

If workers are assessed as employees under IR35 for tax purposes, their employers need to quickly ascertain their liabilities and prepare themselves if it transpires they owe sizeable back-payments.

While backdated holiday and sick pay can amount to significant sums, pension contributions potentially represent a much bigger financial risk to employers.

Under UK law, all employers are obliged automatically to enrol in a workplace pension scheme employees working mostly or entirely in the UK, aged between 22 and state pension age and earning more than £10,000 per year.

Assuming that an individual's working practices have not changed over the course of their engagement by the end-user, these individuals could be owed significant sums in pension contributions.

The employers' automatic enrolment obligations are subject to the worker's right to opt out of membership of a workplace pension scheme. Employers are statutorily prohibited from inducing a worker so to opt out.

Aside from potential administrative costs, pension auto-enrolment could potentially be affected in a way which causes no overall loss to either contractors or clients.

For example, if the worker is prepared to accept a reduced salary in return for pension contributions, this is one way in which the workers can continue to enjoy some tax benefits, without increasing the cost to the employer.

Achieving a pension position that is acceptable to the worker, client/intermediary and HMRC relies on careful negotiation and full presentation of the facts and available options.

While the remit of IR35 is in theory relatively clear, many end users are concerned that any contractors they retain off-payroll will eventually be reclassified as employees by HMRC, creating a ticking time bomb of employment and pensions claims.

Accordingly, some businesses have concluded that the only viable way of addressing this risk is to seek insurance.

In advance of April 2020, end user businesses will need carefully to assess whether contractors who use personal service companies are in fact workers and employees for IR35 and also for pensions and employment law purposes.

If they are workers, such businesses may be faced with an obligation to pay backdated pension contributions to workplace pension schemes for them.

Businesses may be able to mitigate that obligation by agreeing with the individuals to reduce their pay or by insurance.

In some circumstances, the business may be able to justify, on advice and by careful analysis, the continued treatment of such individuals as contractors.

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