Why most limited company contractors’ clients aren’t reversing their IR35 reform status decisions
Reform of IR35 (the off-payroll rules) in the private sector has been delayed until April 2021 due to the Covid-19 crisis, but does this late move by the government really help contractors?
It’s a question worth asking, writes Helen Christopher, operation director at Orange Genie, because while the delay appears to be good news for some, it comes far too late for many and leaves limited company contractors confused as to what they can do.
Contactors have questions, understandably
Can a contractor insist that they use their Personal Service Company? Do contractors have a right to continue using their limited company because the rules have not changed yet? Should they refer their end-client to the government to make them change their mind? Are Status Determinations Statements now null and void? Can clients implement a legislation that isn’t law?
The bottom-line is that contractors can only try to insist on using their PSC, assuming their end-client is at least still prepared to engage with PSCs. A number of end-clients have already issued policy statements (since the announced delay to IR35 reform and before it), that they will not engage with PSCs. In short, due to the blood, sweat and tears that many organisations endured (especially those in Financial Services), it appears that many engagers are simply not in the mood to change their minds; they are just not prepared to undo months of planning. In response, the contractor can decide not to engage with such an end-client, of course, and and seek a contract elsewhere. We will have to see if a loss of resource for those engagers refusing to rethink leads to any policy retractions.
Still incoming, still HMRC risk
The important backdrop is that a number of end-clients have invested significant time and money in understanding their obligations under the revised (still incoming) off-payroll rules, and accordingly have delivered Status Determination Statements (SDS) to their contractors. While there may be some technical arguments around the legality of an SDS before April 2021, end-clients and contractors are in a difficult position. Where an SDS gave an ‘Inside IR35’ determination (and let’s assume that determination is accurate), parties may already be compromised. If the end-client now decides the role is ‘Outside IR35’ or the contractor chooses to ignore the previously ‘Inside’ assessment, contractors must be aware of the possibility of an HMRC enquiry.
Also true, is that a dilemma exists between the argument that the SDS can be destroyed and ignored, potentially under a contractor’s ‘right to be forgotten’ for GDPR purposes, and the morality of ignoring what you know to be the correct employment status for tax purposes.
What about contractors who quit, joined the payroll or went PAYE umbrella?
On a practical level, an ‘Inside IR35’ SDS delivered before April 2020 will have prompted end-clients and contractors to take action, prior to the announcement of the delay. If the contractor has already ‘handed in their notice,’ and left the contract, their end-client has the upper hand. The engager can determine if they wish to re-engage or not and on what terms.
And if the contractor has gone ‘permie’ at the end-client organisation, then there really is NO going back to contracting in that position. An HMRC investigation would very likely find the contractor ‘Inside IR35.’
But numerous contractors responded recently to their customer’s ‘Inside IR35’ determination by taking up employment with an umbrella company, and begun the process of putting their PSCs into liquidation. Assuming the end-client is now willing to use PSCs (potentially because they’ve rethought their position due to the announced delay to IR35 reform), a contractor wishing to return to a PSC from an umbrella company will need to give his or her umbrella (and/or agency), notice, so that the correct contracts can be drawn up. But the moral dilemma referred to above will still exist, if the assignment is genuinely ‘Inside IR35.’
Yet it may be possible to halt any liquidation and reverse it so that the PSC can be retained. Beware though, if the closure process is advanced starting a new PSC potentially endangers the contractor’s chance of claiming Entrepreneurs’ Relief under General Anti Avoidance rules aimed at prohibiting the “phoenixing” of companies purely for tax purposes. This should be born in mind and tailored professional advice ideally sought.
Yesterday’s unprepared are now the most unburdened
Finally, and somewhat perversely, the announced delay to IR35 reform will be more beneficial to end-clients and contractors who have failed to complete their preparations for the revised off-payroll rules.
End-clients who have issued SDS, by contrast, can still be positive and almost use them as a ‘to do’ list, sign-posting them to work with contractors in the coming weeks and months to change the working practices and relationship, in order to find assignments ‘Outside IR35’ for April 2021. More positively though, where an end-client has not issued any SDS whatsoever, the lack of information and audit trail may now allow for the role to be viewed afresh for April 2021, meaning in the meantime contractors can carry on using their PSCs.
After this breather, don’t expect the landing to be ‘soft’
So while contractors may not be able to insist that their end-clients engage with PSCs, there has perhaps been a shift in the balance of power, at least for a few months. Contractors have an opportunity to look for assignments with end-clients who have demonstrated a willingness and openness to engage with PSCs. There is now time to learn from this year’s dry run and for end-clients and contractors alike to work together to find ways to engage on an ‘Outside IR35’ basis.
There will undoubtedly be opportunities for PSCs to continue in more numbers than perhaps we had envisaged from April 2020. But contractors should not ignore IR35. Never more than now has it been important for contractors to truly understand their IR35 status. Indeed, to operate a PSC without regard for the reality of your status would be plain foolish, particularly as IR35 reform being delayed not dismantled makes HMRC’s promise of a soft-landing unlikely to come to fruition, with investigations of those who move from ‘Inside’ to ‘Outside’ a danger and a prospect.