Contractors, switching back to ‘outside’ status is the perilous part of IR35 reform’s delay
As much of the contractor sector is now noticing, the recently announced delay to the imposition of HMRC’s revised IR35 rules on the private sector has created a tempting scenario for many end-clients -- and contractors, writes Graham Webber, tax director at WTT Consulting.
Indeed, it’s been just a little over three working days since the announced delay, but already we have seen one of the major banks which decided early upon a ‘blanket ban’ on PSC contractors to now be indicating a change of policy. Whether this ‘change’ changes again on the eve of April 2021, not even the engager itself probably knows at this stage.
What we are seeing currently however, is questions from individuals -- including those who were blanket-banned, asking whether despite being given an SDS stating their role was inside IR35, could they now execute the role on an outside IR35 basis?
Obvious answer, obvious risks too
The answer is obviously that they could. However, that brings a heightened degree of risk of subsequent HMRC enquiry. What’s more; this would likely be an IR35 enquiry that may not start until late in 2021 (or even later), and which will therefore be dealing with a period which, by then, will be buried in the past.
Where an end-client has prepared an Status Determination Statement (SDS) and this has been made available to all parties in the contractual chain, a sudden volt-face without the underlying role being changed or adjusted in some manner, would be a weakness in any argument with HMRC that the contractor is indeed outside IR35. It would be a risk for the end-client as well.
What the taxman will ask, if not think
‘Why did they decide the role was inside but then decided to change it to outside?’ And ‘Was the switch in status just because there was a 12-month window in which the client could retain the talent without a significant increase in cost?’ That is surely what HMRC will ask, if not think. Furthermore, HMRC may well think that the contractor was a willing participant in this process.
Regardless of whether it does, HMRC (which has freshly recruited staff into their investigation teams and who now have a full 12 months to learn the job), will be aware of the situation, meaning it will be able to plan some targeted enquiries. The once promised ‘soft-landing’ for the revised IR35 rules will be a distant memory by then.
If contractors (and end-clients) are tempted by this path of least taxation and costs, they need to be very sure that they have sufficient and timely evidence that the role was indeed outside IR35. That will require careful preparation.
Blanket banned? You might now have more room to manoeuvre
Where an end-client had introduced a so-called ‘blanket ban’ (which in practice is really just a ban on PSCs), and has not conducted a proper and reasonable view of whether the role is inside or outside IR35, then there is perhaps more opportunity to claim that a post April 2020 position is outside IR35. These may be in the second wave of HMRC enquiries, but make no mistake -- there will be enquiries.
Logistically worse perhaps, where a contractor has already put their PSC into liquidation in the expectation of claiming Entrepreneurs’ Relief, clearly continuing as an outside IR35 contractor has a problem. The funds from contracting cannot go into that PSC; nor can a new PSC be created without endangering the claim for Entrepreneurs’ Relief! It will therefore be necessary for such contractors to find another route or rely upon pure sole trading as unincorporated self-employed, in which the only ‘saving’ is limited to NIC rates.
Despite these unappealing options, contractors should definitely not be tempted into a ‘scheme’ or ‘arrangement’ – particularly those which claim to be umbrellas or otherwise, in order to seek that limited advantage. It is a false economy.
A better path, we suggest, is to consider the 12-month delay to the new off-payroll framework as a time to consider and prepare carefully for the longer term.
If genuine contracting is the chosen path, then obtaining the benefits of a lower government levy on earnings, will need to be planned carefully. This requires a change of mindset. It requires contractors to become businesses and not timesheet-led. Being a genuine business means taking on more risk, but for more reward. End-clients will be required also to learn this lesson.
Back to the future
To me, much of what looms has a sense of déjà vu. Indeed, when the last great upheaval in the professional contracting industry happened, in 2000, it opened the door to the unscrupulous promoters of ‘solutions’ and the like, all of which have so far been proven to be far from the promised answer. The only people who can now prevent this happening -- again, is contractors. And finally contractors, don’t skimp on preventing history repeating itself; seek totally unbiased advice from totally trustworthy sources.