IR35 Regulation, a payroll regulation, will take effect in the UK from April 6, 2021, and will transform the way “off-payroll” or (contractors) are taxed by the HM Revenue and Customs (HMRC) and the ways they need to be represented by the HR payroll systems.
The changes explained below will apply to all payments made for services offered on April 6, 2021, onward and will have an expensive, labor-intensive pressure on enterprises.
IR35 in detail
IR35 rule is an anti-avoidance formula which states that off-payroll workers (a term used by HMRC to address contractors or vendors responsible for offering a service to an end-client without being paid via the client’s payroll system) involved in performing similar tasks as full-time employees are compliant to Pay As You Earn income tax (PAYE) regulations and National Insurance (NIC).
As per PAYE regulations, third-party contractors need to be paid directly and pay tax as they earn.
Additionally, businesses that receive services from contractors are also their end-client. Furthermore, the Regulation explains that the end-client will have to define the contractor’s employment status, their Personal Service Company (PSC), or LLC (Limited Liability Company).
In essence, it is now the end-client’s perpetual responsibility to assess employment status and pass those details to a contractor payroll agency or the PAYE and NIC from the fee they pay to the contractors themselves.
The concern to an organization’s HR department is – in case the End-Client or any other party in the chain fails to categorize the contractor as per the Check Employment Status Tool by HMRC and pass on their employment status to the intermediary, worker, or the agency, the End-Client will be held responsible and will be liable to penalties.
Here are several other 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 prevent possible PAYNE non-compliance issues, End-Clients need to categorize all workers (contractors) as full-time employees, which exposes the organization to a slew of miscategorization of liabilities.
- Businesses often allow department leaders to hire contractors based on their budget, but by integrating contractors as full-time employees, budgeting gets highly complex.
- Furthermore, the department also has to bear an additional burden of the inefficient and time-consuming onboarding, offboarding, and managing the short lifecycle of temporary contractors.
The role of SecZetta in enabling IR35 and PAYE compliance
SecZetta’s Third-Party Identity Risk solution is developed with a purpose to effectively reduce the risk of regulations such as these and to deal with lifecycles, categorization, and risk of contractors or off-payroll and freelancers, including every type of non-employee such as vendors, students, interns, and affiliates
SecZetta can merge with an organization’s present HRMS (Human Resources Management System), VMS (Vendor Management System), and IGA (Identity Governance and Administration) systems to deal with the off-payroll/non-employee compliance and lifecycle management loopholes that these systems have.
HRMS platforms are not designed to maintain and manage information related to off-payroll employees. However, if organizations and HR departments move contractors to their HRMS platforms, it may lead to compliance and legal issues.
Here are some of the other issues related to adding off-payroll workers to the organization’s HRMS systems:
- HR systems will require extensive customization to cater to a diverse range of off-payroll or contract employees, making implementation lengthy and expensive per identity.
- HR systems are not fit to manage complex and multiple relationships encountered with the off-payroll workforce.
- HR teams must level up to be able to deal with the management of additional people.
- It is complex for HR systems to add audit attributes.
- Adding information of non-employed or off-payroll population in the HRMS system conflicts with the US’s IRS and other country-specific regulations.
- When off-payroll employees are placed in an HRMS, they might appear to be classified as full-time employees, proving detrimental and leading to legal issues.
SecZetta’s Third-Party Identity Risk solution addresses such issues and caters to the gaps to potentially complement the existing HRMS platform. The solution can,
- Build a single source of authoritative data of third parties of all types to prevent misclassification.
- It can enable users to add regulation checkboxes and assign statuses in a hassle-free manner.
- Create a single source of authoritative data of third parties of all types to avoid misclassification.
- Allow a user to add regulation checkboxes and assign status easily.
- Automate lengthy and expensive manual processes with bespoke workflows.
- Lessen risk and cost associated with misclassification of employees and co-employment violations.
- Allow internal and external resources to add information necessary for off-payroll employees.
- Simplify audit creation.
- Integrate with HRMS, VMS, IAM, and IGA systems via APIs
Additionally, the drag and drop features by SecZetta and the intuitive dashboard designed to resemble an HR system layout need no special training, and one can easily set employment type status checkboxes or workflows.