UK IR35 Changes: What Pharma Companies Need to Do

March 31, 2021

The arrival of the new UK financial year on 6 April brings with it the IR35 reform on the private sector. Affecting any businesses that employ contract workers, the new legislation places responsibility for determining whether contractors are taxed as permanent employees or off-payroll workers, on the organizations themselves. Going forward this means firms will need to determine whether the services provided sit as self-employment (outside IR35) or employment (inside IR35).

As an industry which employs a significant amount of contract workers, the pharmaceutical sector will need to ensure it is ahead of these changes to remain compliant.

In August 2019, HMRC raised awareness of the impact of non-compliance in the pharma industry, by issuing compliance letters to nearly 1,500 GSK contractors regarding their IR35 status. The compliance letters from HMRC accused contractors of wrongly operating outside the IR35 legislation during the tax year, 2018/19. The industry saw this as a warning shot.

The largest impact will be on contractors in the private sector. They will see a reduction in their pay if found operating outside of IR35. There has been a surge in contractors across the sector in recent years and it is understood that many were taking advantage of tax benefits. HMRC’s revised legislation will close this loophole.

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. Best practice is for pharmaceutical companies and clinical research organizations to use the CEST tool in combination with an independent employment expert adviser. Having an external expert providing professional and impartial advice will help mitigate the risks of unintentional compliance breach.

HMRC has allowed some breathing room, announcing that organizations found in breach of compliance will not be so heavily penalized in the first 12 months as companies adjust to the new rules.1

At a time when the healthcare industry has seen drastic changes through digital technology innovations and the COVID-19 pandemic, companies need to remain competitive.

Dominic Mitchell, Operations Director at RBW Consulting commented, ”The impact IR35 has on the life sciences industry is immense, but companies do need to get their house in order, to comply. 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 organizations. To reduce the impact on operations it’s key that affected organizations act now.”

Note

1. https://www.computerweekly.com/news/252496381/IR35-private-sector-reforms-HMRC-reminds-firms-to-use-reasonable-care-when-applying-new-tax-rules