Dominic Mitchell, operations director at RBW Consulting, explains how the new IR35 changes can affect the self-employed workers in life sciences.
The new IR35 tax bill coming into effect on April 6th will impact over 230,000 self-employed workers. The new legislation will place the responsibility of determining whether contractors are taxed as permanent employees or off-payroll workers on the organisations themselves. This move is part of a HMRC clamp down on contactors who misclassify their employment status as outside of IR35 to pay less tax.
The impact on the life sciences industry is particularly concerning. With a large number of companies engaging contractors to get vital work done, it could negatively affect innovation and slow trial progress, as these companies face the potential of losing these teams of freelancers if work is determined to fall inside the scope of the regulations. At RBW Consulting, we have been helping life sciences companies prepare for this change. Now more than ever it is important that sponsors and vendors alike are as minimally disrupted by this as possible.
While the new rules are just around the corner, life sciences contractors and companies need to know what to expect when the new policy takes effect and how to remain compliant.
The CEST tool
The HMRC Check Employment Status for Tax (CEST) tool, is available online for all organisations to use when assessing how their contractors should be taxed. However, this tool should be seen as a starting point rather than a one stop shop for reviewing all contractors. CEST is still a work in progress and to fully rely on it could leave organisations vulnerable to compliance failure.
The IR35 legislation does not effectively deal with the issue of Mutuality of Obligation (MOO). MOO is one of HMRC’s fundamental employment status tests. The purpose of MOO between a company and contractor is to outline that the company is obliged to provide paid work and the contractor is obliged to accept and complete the work. As is standard in an employer – employee relationship.
Best practice would be for organisations to use the CEST tool in combination with an independent employment expert adviser. Having an external expert advising a pharma company helps mitigate the risks compliance breach.
Dedicate resources to IR35
As the responsibility for determining the tax status of contracts now sits with organisations, they need to have someone within the company that is managing the process. This is to ensure a clear audit trail is present, review the current tax status of contractors, and advise contractors on their tax status and the effects of any potential changes. Therefore, it is necessary for companies to dedicate an appropriate amount of time and resources to ensure a seamless and compliant transition to IR35.
As the deadline fast approaches, companies will be frantically trying to get their house in order. And with many different stakeholders involved, assigning someone with the responsibility of managing the IR35 activity will ensure that the company is on track to be IR35 ready when the new measure comes into effect on the 6th of April 2021. This can sit within legal, finance, or operations teams but plan for them to bring in external expertise.
Be adaptable
Last year was a particularly challenging time for the life sciences industry. The COVID-19 pandemic forced the industry to adapt to new remote ways of working and conducting trials. This showed just how agile the industry can be when faced with new challenges. With tax liability now sitting with pharma and vendor organisations, it is important that companies take the time to review their workforce, determine the status of contractors, and review their workforce with the help of CEST, external experts, and an equipped internal IR35 team or person.
HMRC recently restated that organisations found in breach of compliance will not be so heavily penalised in the first 12 months as companies adjust to the new rules. Therefore, even though the new measure come into effect in April, companies will be afforded a grace period to get it right.
With the pharmaceutical industry having such a heavy reliance on contractors, it is clear the incoming IR35 regulations have the potential to disrupt clinical trials and the innovation of life science organisations. To reduce the impact on operations it's key that affected organisations act now, before the grace period ends, to set themselves up for a smooth transition.
