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IR35 compliance: how retaining your contractor talent should come before risk-aversion

By Hannah Robinson, Digital Marketing Manager

The way we work in the UK is set to change drastically over the coming years. From Brexit and near-constant shifts in government to a trend towards contracting and gig work, the generally accepted forecast is that our current methods of doing business will be entirely different in a decade – maybe less. The IR35 reform is one of these changes.

Hannah Robinson
Hannah Robinson

The reform was applied to the public sector back in April 2017 to widespread criticism; despite this, it’s due to come to the private sector on 6th April 2020. Industry experts are anticipating it to impact contracting significantly and, in certain ways, it already has.

What is IR35?

IR35 is known by a few names. The term IR35 itself is shorthand for ‘Intermediaries Legislation’, as coined by then-Chancellor Gordon Brown back in 1999, and is sometimes referred to as the ‘Off-Payroll Working Rules’.

Let’s start with some context:

A financial consultant is contracted by BusinessCo. They are engaged and paid through their own limited company. This limited company is the intermediary between the financial consultant and BusinessCo, the client, and means that they aren’t providing their services directly. They have a contract for services, as opposed to a contract of employment, and are therefore exempt from paying income tax or National Insurance Contributions (NICs). However, they don’t receive employee benefits like holiday or sick pay and must cover their own overheads, like equipment and travel. This tax relief allows them to set aside enough money to pay for said overheads, as well as save for time off and retirement.

The purpose of IR35 is to identify individuals that are abusing the above system to avoid paying tax. IR35 targets contractors, freelancers, and any self-employed person that is engaged by a medium-large company and is perceived to be taking part in such tax avoidance through the use of a limited company or PSC.

If you’re found to be inside IR35, or are ‘caught’, then HMRC has determined that you are indeed partaking in the tax avoidance outlined above, and that you’re therefore a ‘disguised employee’ and should be paying income tax and NICs.

How is IR35 being reformed?

Although IR35 has been through a few iterations since its inception, contractors were always in control of their own employment status determinations – i.e. it was up to them to class themselves as inside or outside the legislation, and they alone were responsible for paying the extra NICs and income tax if they were ‘caught’.

However, in 2017 the government decided to shift the liability for deciding employment status from the contractor to the fee-payer, meaning it’s now up to the end-client or recruiter to decide which side of IR35 the contractor sits. The public sector reform, which came into effect in April 2017, also saw the fee-paying party in the supply chain pick up the IR35 liability from the contractor. From 6th April 2020, the IR35 reform will be extended to the private sector, with medium and large businesses set to determine IR35 status with fee-paying companies liable for any mistakes.

How has IR35 affected contracting so far?

You might have heard the term ‘blanket determinations’, which somewhat defined the 2017 public sector reform. A blanket determination is when a company places all contractors inside or outside (but usually inside) IR35, without taking any of the details of a worker’s contract or working practices into consideration.

HMRC has stated that ‘blanketing’ is not compliant, but this hasn’t appeared to prevent it from happening in the public sector. This resulted in thousands of genuinely self-employed contractors being placed inside IR35 and paying tax at a similar rate to an employee.

In 2018, the government confirmed that IR35 changes would be extended to the private sector in April 2020. Many expect the same blanketing from the private sector and to a certain extent, it’s already started; large corporations like Barclays, HSBC, RBS, Morgan Stanley, and Lloyds have announced that they’re pushing all contractors to PAYE or approved umbrella companies, or simply culling self-employed workers to avoid the off-payroll rules altogether.

 Why culling contractors isn’t a risk-free way to deal with IR35 

Those companies that’ve announced a limited company contractor cull could well be shooting themselves in the foot. By taking such a stance, they’re ultimately directing highly skilled contractors to competitors who are willing to embrace the IR35 reform. The medium-large companies that are willing to work with contractors to legitimately preserve their self-employed status will enjoy the cream of the crop with little competition, resulting in coups that could prove business-defining for certain underdogs in the financial and pharma world.

“Rumours of a contractor mass-exodus had been circulating even before HSBC officially announced its IR35 position,” says Andy VesseyATT, Head of Tax and IR35 Specialist at Larsen Howie. “Experienced, talented contractors will have little problem taking their services elsewhere. Many of these contractors will have worked with the banks for several years, taking with them in-depth technical knowledge of programmes and processes. Not only will this be difficult to replace but it could prove a threat to the likes of Lloyds, Barclays, and HSBC as a business – particularly if those same contractors are approached by a similar business willing to apply the off-payroll rules correctly.”

HSBC, in particular, retracted some of their badly-worded initial statement. They suggested instead that they were looking into alternative routes around IR35 like service providers, which would effectively shift the liability down the supply chain. Vessey doesn’t think this method will be the shortcut the banks are looking for, though.

“If the banks do point contractors in the direction of a contracted-out services provider, then they will have to be certain that they are happy to relinquish control of project work to that third party and that the contingent workers are not personally providing their services to HSBC,” he says. “If not, they will find they still need to consider the off-payroll rules anyway.”

What can businesses do to prepare for IR35 without blanketing? 

There are many routes that businesses can take to proactively prepare for the IR35 reform, however, including identifying the number of workers who currently operate via a PSC or limited company, determining if IR35 applies to any contracts and working practices that extend past April 2020, and assessing arrangements involving complex labour supply chains. Talking to contractors about where they feel they sit in accordance with IR35 is also something that shouldn’t be overlooked; developing a communications plan is crucial for making sure everyone involved understands the legislation and its implications.

The most important thing to remember when preparing for IR35 is that collaboration is key. Make sure to maintain good communication during the whole process and encourage openness throughout the supply chain to minimise the potential for any nasty surprises while maintaining – or even building on – trusting business relationships.