Updated: Jan 20, 2021
Good morning, I hope you’re well and enjoying the spring weather.
Whilst I hope these circulars are relevant to most, this edition is aimed mainly at existing or potential Contractors or businesses involved in the placement of Contractors.
IR35 is a topic that a single email is not going to do justice to. Never mind the array of publications on the subject, an entire industry has emerged around IR35 including insurance provision, contract reviews and legislation experts, for example. You as professional and skilled consultants, or representatives of such, are likely to be well advised on the issue and have views of your own.
What I hope this note will do though is act as a prompt for you to start planning for the upcoming changes to IR35.
At the beginning of the month, I attended the annual Accountex conference at the Excel Centre, London - a large gathering of Accountants from firms across the UK who convene to share ideas, hear about upcoming regulatory changes, and to source new systems and suppliers. Now clearly this is one of the coolest dates in the London calendar, but it’s also quite informative – IR35 was a topic that was included on the agenda. I’ve included some of discussion points from these sessions below:
IR35 AND PREPARING FOR APRIL 2020
14TH MAY 2019
The IR35 rules became statute via the Finance Act of 2000. It is an attempt to clamp down on individuals operating via ‘Personal Service Companies’ (PSCs), who are working in a manner akin to that of an employee, but enjoying the tax benefits afforded to them by the corporate structure.
Contemporary trends like the desire to work flexibly, multi-careers (also known as ‘slashies’) and the emergence of the gig economy have all contributed to the growth in self-employment and the use of PSCs.
Whilst rules are varied and nuanced, there are 3 core principles when determining if an arrangement amounts to proxy employment. Both the contract and the working reality is assessed and must satisfy these principles.
• Control – to what extent does the client determine how, what and when the Contractor performs the work
• Substitution – can the Contractor send a substitute or is a particular individual stipulated
• Mutuality of obligation – to what extent is the client obliged to offer work, and to what extent is the Contractor obliged to accept the work
In addition to this, other considerations include responsibility for training/upskilling, flexibility of location, equipment supply, invoice frequency and amounts, disparity from client (e.g. presence on network, directory, building passes etc).
It is the responsibility of the Contractor in the private sector to determine their IR35 status. If IR35 applies, either self-determined or via an investigation, then a deemed payment becomes due (minus a 5% expense allowance) in respect of the contractual period in question, for the additional income tax and NICs that would have been owed in the event of conventional employment.
Proposed changes in April 2020
The responsibility for setting the IR35 status in the private sector is to be passed from the Contractor to the end client. In addition to this, any extra tax liabilities arising from an incorrect IR35 status will pass from the Contractor to the party who pays the fees. This could be the end client, but more often than not, it is an intermediary such as a recruitment agency. This change was made in the public sector in 2017.
Contractors working for small companies (Companies Act 2006 definition) either directly or via a recruitment agency are not affected by this change and so they are still responsible for setting their own IR35 status.
Let me stress, nothing about the IR35 fundamentals has changed. If you are in a contract that is legitimately outside of IR35 today it will continue to be outside IR35 after April 2020. This change simply creates a further mechanism for HMRC to identify when IR35 is not being met.
An appeal mechanism is to be created and HMRC are to prevent businesses from making blanket decisions – each contract is to be assessed on its own merits.
Potential market effects
Let’s speculate for a while on what this could mean in the private sector.
What’s troubling many Contractors is whether businesses or their intermediaries will have a similar risk appetite to them in their assessment of an IR35 status, given who is now exposed to the financial risk.
Companies or recruitment consultants, particularly large corporates with the biggest exposure, rather than accept any risk, may roll out a blanket ban of ‘outside IR35 contracts’. Or they may continue to offer contracts but have a highly prudent approach to the assessment resulting in few to zero contracts outside IR35.
Workers could flock to agencies and their clients, who are prepared to engage with Contractors outside of IR35, leaving a recruitment headache and a much smaller talent pool to those who aren’t prepared to assume the responsibility or financial risk. The impact on the supply chain could be felt across many industries.
On the other hand, businesses may choose to engage in the process proactively, identifying Contractors operating via PSCs as a cornerstone of the UK labour market. For businesses like this, firms may appoint an individual or team to operate IR35 duties performed and documented to the highest standard, with the resulting impact on the business being minimal.
What’s certain is that the demand for flexible labour will continue, in order to deliver short term assignments. Companies do not want an inflated headcount, particularly at times of uncertainty like this.
They may choose to offer fixed term contracts - agreements with a start date and end date and complete alignment with standard employment rights. Due to the on-payroll nature of these contracts, remuneration would likely be hamstrung by employer pay grades. However, many contractors choose to work as they do for reasons other than financial. Contractors often enjoy a comfortable distance from internal politics and bureaucracy.
What if the end client and the agency disagree over an IR35 status? Will a ‘drama triangle’ form involving the PSC? Will business insurance products provide adequate mitigation to the fee payer?
It’s fair to say, we don’t know how the private sector will respond at the moment.
So what should I do
I believe Contractors will remain in high demand post April 2020, if evidence from the public sector is anything to go by. We have clients in place with Schools, the MOD and indeed HMRC, the very body charged with overseeing the regulation. Lessons have been learned from the early days of the public sector roll out too, when there was reported mutiny in the health sector and widespread delay to projects.
However, it’s important to be prepared.
The HMRC tool ‘CEST’ which tests IR35 status is legally binding and so is worth a look. However it has been heavily criticised for bias, unreliable results, and ignoring key principles.
As a contractor, come April 2020, you may need to be in a position to produce ‘proof’ of your IR35 status, backed by a professional/legal entity in order to positively influence client decisions. By doing some of the legwork, you can help provide the ‘reasonable care’ element for your client and perhaps educate them in how to do that for themselves. You can produce a report yourself, come to me for a second opinion or approach specialist Contractor Service Companies. Whilst the end client has the final say, you have every right to be involved in the assessment and challenge where necessary.
Start having conversations with your clients (existing and potential) and recruitment consultants now. Put the emphasis on them around how they plan to structure roles to keep them out of scope. Find out what arrangements they are making in preparation for April 2020. Remember, there is huge incentive for these parties to have a robust process in place to appeal to Contractors looking for ‘out of IR35’ roles.
Put in place some contingency plans of your own based on various scenarios. What would you do with your Personal Service Companies if you decide to or are forced to opt for full time/short term employment? Dissolution, Dormancy or perhaps it’s time to look into an alternative small business venture?
You may decide to continue Contracting inside IR35, opting to work under an umbrella company perhaps to reduce the administrative burden that comes with a PSC. Preparations are being made to incorporate a subsidiary of this Practice to accommodate new and existing clients who opt for this.
HMRC would like your views on the proposed changes. If you wish to contribute, all the information you need can be accessed below.
If our government’s recent track record is anything to go by, gaining clarity well before the proposed roll out date is not something we should automatically expect. The consultation concludes on the 28th May with the government expected to report back in July. If all goes as anticipated, the autumn statement will confirm the April 2020 rollout.
I’ll aim to follow up on this circular around that time.
In the meantime though I’d be really interested to hear your thoughts.