April's off-payroll rules: what one agency thinks

For part one of a three-part series exploring the recruitment sector’s view of April’s off-payroll rules and their reform to IR35, ContractorUK quizzed Tim Jacob, commercial director of Rethink Group and an executive committee member of REC’s Technology Executive Committee.

How has your agency’s end-user clients responded to the incoming framework? And what effect has this had on PSCs -- have they signalled they will exit the public sector or remain in it?

When the announcement was first made there was a lot of confusion and concern from public sector clients who are facing the prospect of being unable to retain their PSC contractors.

Their concerns still remain and, while we await definitive information from the government and HMRC, there’s an increasing demand from clients who simply want clarity.

We’re still evaluating the exact response of PSCs but ultimately there’s a consensus that rather than leave the public sector, they’ll look to increase fees and day rates to cover the losses. The next 4 to 6 weeks will provide more clarity.

What steps has your agency taken to prepare for the April 6th commencement?

While it’s imperative that we ascertain all of the information from HMRC before offering formal advice, we’ve certainly made strides in guiding clients through the early stages of this legislation.

We’ve dissected and communicated to clients and contractors everything we know so far and there’s an incredible amount of ‘behind the scenes’ work going on within our business to assess how the legislation will work in practice.

Rethink is making changes to systems, process and reviewing all our terms with PSCs.  We are also engaging external advisers to provide guidance on policy and possible future models.

Has your agency heard of ‘work package-based contracts’? Some say these will apparently allow for the continued, compliant use of limited companies post-April 6th in the public sector, potentially without having to check if IR35/the off-payroll rules apply.

We have, however we are taking wide-ranging advice before we advise clients and contractors formally. We are also exploring opportunities with our Cognita Projects brand.

The IR35 tests are based on working practice, not just what it says in the contract. Also note, the new legislation covers where the services are “performed personally by the worker”. 

In your assessment, who is expected to be liable and, in what circumstances, would the end-user be liable?

[Editor's Note: This answer was amended on 17 Feb] The legislation transfers the liability for deciding who is inside or outside IR35 from the Limited Company (PSC) contractor to the public sector client and agency (or party paying the contractor – including consultancies).

The paying agent or fee payer, that’s usually us – the recruitment agency, will typically be liable for the correct deduction of PAYE and NICS.  The end-user public sector body is initially responsible for the decision of whether each engagement is inside or outside IR35. However if the end-client has not informed the agent after 31 days, then it’s the end-user who becomes responsible for accounting for PAYE. There is much talk (at the time of writing) that the final legislation may be altered so as not to saddle the end-user with having to make this deduction if they fail to reply with 31 days. We'll have to wait and see. 

What is already clear is that if an outside IR35 decision is made by the end-client and it is subsequently overturned by HMRC, then the paying agent is liable for incorrect deductions. If an outside IR35 decision is made by the end client, but the agent is aware of material facts that would put the engagement inside -- for example if the worker is an ‘office holder,’ the paying agent must apply that knowledge to the decision of the end-client.

Will your agency ever pay a PSC on the basis of what an IR35 contract review says about that PSC’s status, rather what the end-user decides, or rather what the IR35 tool (the ESS) says?

Not if the end user has said the engagement is inside IR35. However, we might use it as a basis to contest that decision. The new legislation is quite clear on this point and HMRC is strongly encouraging the use of its online Employment Status Service (ESS) tool to test contractors’ engagements. HMRC will be bound by any decision determined by its tool, assuming the facts entered are accurate. The tool uses already established HMRC case law on IR35 status.

Rethink has seen an early version of the tool from HMRC which shows that it is the actual working practices that determine an IR35 status, not what the contract says.

It’s important to note that clients do not have to use the tool, however without it they would need to apply expert opinion to assess their decision.

What’s your message to end-users, or what one thing are they not realising in light of the new rules? Is the reported (but unconfirmed) strategy of upping rates by 20% a recommended way to retain contractor talent?

It’s definitely something that candidates are considering and a way of them preserving their relationships and contracts without absorbing the financial impact that IR35 brings.

But from the standpoint of end-users, obviously one has to consider the impact of the strategy you mention on, for example, the NHS, in the long term. Generally though for end-users, either they find the headcount, pay the extra or rehire.

Can you please outline how you have found HMRC to be, in liaising with your agency and providing your agency and its PSCs, with help and guidance?

We’ve been fortunate enough to enjoy a close working relationship with HMRC via the Recruitment & Employment Confederation on this, and met with them regularly to discuss the changes. They’ve been helpful, honest and transparent. However there have been periods where they’ve failed to communicate specifics and that’s caused confusion.

Do you have a message to HMRC ahead of the April 6th start date, and what would you say to PSCs unsure about joining the public sector due to the rules commencing then?

Given that the announcement confirmation was only made at the Autumn Statement in November 2016, time’s arguably too short and there are calls for HMRC to postpone the start date.

In lieu of that, the best advice we can offer is that PSCs need to absorb all available information so they’re fully aware of the impact on their retention post-April 6th.

Lastly, how do you expect PSCs to respond to these changes in the longer term? Will they seek out consultancies, as some of these may be exempt? Will umbrellas and agencies become, by and large, the employers of today’s independent PSCs? And will the public sector be short of skills?

PSC can still be operated under the legislation and we will be able to process PSCs inside IR35. The PSC will see a reduction in retention, meaning they’ll either need to transfer to the private sector -- if they have the skills – to pitch for a rate increase, to go permanent or simply accept the changes and move forward.  Consultancies who offer workers who provide the services personally could still be caught by this, so it is not a silver bullet to join such outfits, unless the consultancies are providing employees to do the services. The key test for consultancies is whether their service is based on a deliverable. And yes, in the short-term the public sector will struggle to find its skills.

Editor's Note: This is part one of a three-part series exploring the contractor recruitment sector's view of the April 6th framework. Read part two here.

Feb 15, 2017