How the IR35 reform consultation affects contractors
On Tuesday, the government launched a consultation into how the off-payroll working rules should be implemented within the private sector from April 2020.
People are saying the document was ‘long-awaited’ – it wasn’t really, as it was only promised in late October, just over four months ago. But it is ‘eagerly-anticipated’ because its implications could be massive.
Contractors have just over two months to absorb the details and respond, ensuring their voice is sounded -- if not heard -- before the legislation becomes effective next year, writes Joe Tully, managing director of Brookson Legal Services.
The right to reply
There are a couple of modifications in the policy paper that should encourage contractors.
In particular, one of the big problems with the IR35 changes in the public sector was that contractors didn’t have any forum with which to challenge status decisions. A key concern in the past has been that organisations may make ‘blanket’ determinations of the employment status of off-payroll workers and not understand the nuances of particular roles and relationships.
As a result, in the consultation, the government is indicating that they will require end-hirers to provide specific reasons for each status determination and, if necessary, introduce a hirer-led status challenge process. Through this, a contractor would be able to put forward evidence to appeal a decision.
This is good news. Not only does it give contractors a route to challenge decisions, but it should also ensure that hirers take their responsibilities seriously and therefore exercise ‘reasonable care’ in their status decisions. They will have to have good reasons for each outcome and contractors now have some comfort that, if a decision seems unfair, there is a ‘right to reply’ and a process to review evidence.
Too end hirer-focused
However, there is no mention of what should happen if a client and contractor do not come to an agreement on IR35 status, having gone through the client-led status disagreement process. The consultation doesn’t offer any provision for further arbitration and this suggests that the decision will, ultimately, remain with the hirer.
Throughout the paper, the clarifications and questions are very hirer-focused and, as such, they do not provide enough certainty for contractors. We believe contractors are well-placed to respond to consultation question 14 and lobby the government for more guidance on how they can challenge status decisions and whether, as a last resort, an independent arbitrator could be appointed. As a legal adviser, we’d say this looks like a wholly reasonable request to make.
The consultation does provide guidance on a number of other key areas for contractors. For example, those caught by IR35 will no longer be able to claim tax relief for pension contributions or deduct a 5 per cent allowance for expenses. This will further reduce contractors’ take-home pay, and could mean that being a PSC contractor is no longer financially preferable to PAYE employment. If this is the case, contractors may want to consider alternative working patterns, solutions or roles.
Also within the paper, the government has listened to concerns expressed by stakeholders about the capacity of clients to implement the changes and has decided that the smallest organisations will not be affected by the reform. We knew this from Budget 2018 but it’s reassuring to see it confirmed.
For contractors, the exemption begs the question “how do I know if I am working for a small business?” Although the consultation discusses the tests for identifying a small hirer, it does not say when the contractor should be made aware of whether they are being engaged by a small business. From next April, it will be vital that contractors know the size of the business they are working with and what this means for them. Unfortunately for PSCs, there is nothing in the consultation about the incoming burden for contractors of having to assess whether the end-user is exempt from the off-payroll rules or not, each and every time contractors begin with a new client.
Begin the conversation
If contractors are currently outside IR35, providing that their end-hirer steps up to the plate with their new obligations, they will continue to be outside and do not need to fear the rules. As the consultation concludes, and the draft Finance Bill is published this summer, contractors should take the opportunity to start having key conversations with their recruiters and end-hirers.
Now is the time to be proactively speaking to your clients about how they are going to comply with the changes and make sure they are taking it seriously. Contractors should talk to their recruiters about how they are going to work on their behalf to protect their employment status. Even if you are concerned that you fall within the scope of IR35, this doesn’t have to mean the end of your contracting – with the right legal advice and the support of hirers, you could get on the right side of IR35.
If contractors encounter apathy, it may be worth highlighting the fact that, from April 2020 onwards, the government is proposing in the consultation that the liability for non-compliance will rest with the party that has failed to fulfil its obligations. This means that liability would move down the labour supply chain as each party fulfils its obligations. This is a big change and will increase the risk on everyone in the supply chain. It underlines the importance of each party putting robust processes in place this year.
It should be noted that the end-hirer is obliged to take “reasonable care” in its assessment of status. If it doesn’t do this it could face a tax charge or find it very difficult to defend a challenge from a contractor. End-hirers should be considering their process to achieve this reasonable care threshold now and not underestimate the change programme facing them over the next 13 months.
HMRC determined to move forward
While the government is inviting a wide audience to respond to the 18 specific questions surrounding the scope of the reform, there is a strong sense within the document that HMRC is settled in the way it wants to bring in IR35. Even the name of the consultation document, “Policy paper and consultation document”, suggests that this process is as much about stating how the rules will be implemented as gathering feedback.
Much of the language refers to giving “greater certainty” about how the off-payroll working rules will operate. We therefore feel that while many contractors may feel angry about these reforms and want to oppose them, the reality is that the government has set its course and it doesn’t look as if it will be shaken. Perhaps, post-consultation, there may be a few more tweaks to the rules but basically contractors should not pin their hopes on the government abandoning these changes. Instead contractors, you should scrutinise the consultation, consider the questions and focus your efforts on trying to shape the more unpalatable parts of the reform while of course, setting about preparing your business – and maybe your contracting partners too -- for the April 2020 rollout.
Editor’s Note: The author, Joe Tully, is MD at Brookson Legal, the only SRA-regulated firm that focuses on IR35 and which has been advising on the legislation since its introduction in 2000.