Private sector IR35 reform is going to banish contractors to a complex, hybrid jobs landscape
There is no doubt that the informal introduction of IR35 changes to the private sector could have been better managed. And the formal postponement to April 2021 offers little reprieve.
The practical upshot of both is that for the foreseeable, contractors will be – and already are-- left to navigate a hybrid job landscape, during what looks likely to be the most challenging global recession in living memory, writes Matt Fryer, head of legal at Brookson Group.
Contractor sector simply wasn't ready
Despite the late postponement decision by the government, by mid-March many contractors had still not received a Status Determination Statement from their hirers. This suggests that the private sector was not ready, which is hardly surprising given the lack of timely guidance provided by HMRC.
While some businesses made the effort to fully understand the legislation, communicate with and audit their contractor workforce, many others introduced questionable blanket bans on working with limited companies or were simply not prepared for the original deadline of April 6th 2020. The process most businesses followed repeated the mistakes made by the public sector in 2017; did not work, and left both the worker and recruiter worse off in terms of both financial and operational impacts.
Some hirers relaxed their policy regarding banning PSCs from their supply chain the very minute that the postponement was announced, allowing contractors to continue to work outside of IR35. But many of those who had already announced blanket bans on working with limited companies are sticking to their guns, reluctant to reassess their decisions and processes, at a time that resources are focussed on business continuity.
Responsibility for IR35 compliance is now back in the hands of contractors, for now. But it is hard to see how things can return to the way they were. Many have been left unsure whether to continue working via their PSC or risk retrospective penalisation from HMRC based on future determinations.
While the taxman is currently busy addressing the COVID-19 emergency, usual service will resume once the crisis is over. In an environment in which funds that can be raised through tax revenues will be sorely needed, focus on tax avoidance may become more aggressive. HMRC has confirmed in briefings with a trade body that retrospective sample testing will continue even after the new IR35 deadline of April 2021. So contractors who knowingly avoid paying the appropriate taxes are taking a high risk.
For now, genuinely self-employed contractors seeking to challenge inaccurate IR35 determinations made by hirers prior to April 2020 should be able to follow assessments made by expert advisers with confidence. Contractors who have been served with a Status Determination Statement (SDS) declaring their work inside IR35 following a thorough audit by their hirer, however, would be sensible to follow this assessment and comply. If you are unsure about the SDS you have received from a hirer, it is worth asking an IR35 expert to independently assess your status. It could save you money for the year and provide you with peace on mind for this year’s tax returns.
The need for flexibility
The following year is likely to necessitate a high degree of flexibility from everyone. The upshot of this is that we expect many contractors finding themselves taking on roles that are both inside and outside IR35. Or if not the latter, not being allowed to use their PSC at all.
This raises a number of challenges for contractors currently working through PSCs. Prior to the postponement of the legislation, we were advising many clients to keep their PSC dormant should opportunities arise for them to work outside of IR35, either on new contracts or in the event that blanket bans might be lifted by hirers who had imposed them. Due to the hybrid job landscape, with hirers offering both inside and outside IR35 contracts for similar roles (and dictating how contractors should be paid), it is now looking likely that contractors will need to switch between PSC and umbrella more regularly on a contract-by-contract basis, assuming they wish to keep contracting and maximise their incomes while remaining tax complaint.
IR35 is tested on an assignment-by-assignment basis, so moving from umbrella to PSC for different assignments will not impact the IR35 status of the PSC assignments and should not attract undue attention from HMRC. The most important consideration is to ensure that any assignments taken through a PSC are IR35 compliant.
For those caught in this halfway house, however, juggling between two ways of working, tax codes and payrolls multiple times a year is likely to create a severe administrative headache, especially when it comes to filing returns to HMRC and making tax planning decisions (e.g. assessing eligibility for tax relief for expenses and assessing earnings for pension contributions), based on fragmented information. It is unlikely that high street accountants are going to be equipped to deal with this complexity, and many contractors will be peeved at having to pay annual accountancy fees on anything less than a full year’s earnings.
Thankfully, some tax specialists are already offering services which take this into account. Ideally, these services should provide contractors with one point of contact for tailored, holistic accountancy advice – in other words, someone at your disposal who is able to take any time working inside IR35 into consideration when planning finances for the PSC – as well as a means to view all contracts in one place.
Look for those offerings which grant access, in real time, to all invoicing and expenses, regardless of the vehicle used to receive payments for the contract work done. That should allow for a proactive tax planning approach which in turn ought to result in a smoother year end.
What happens next?
Prior to the delay in the roll out of IR35 reform, HMRC had announced that it would give the private sector ‘a soft landing’, allowing a year’s grace for companies to adjust their IR35 policies before pursuing investigations. With a whole year for businesses and contractors to prepare for the changes, which were yesterday subject to an unsuccessful bid by MPs to defer them until 2023/24, it is unlikely that this buffer will be fully provided when the rules actually do come into effect, despite Treasury minister Jesse Norman mentioning them in the House of Commons yesterday (see here at 15.57:30).
The big question is whether companies recovering from the economic shock of COVID-19 will take action to address their IR35 responsibilities in time for the new deadline. Our hope is that businesses will realise the value of their contractors and take the necessary steps to retain their talent and skills.
Communication and collaboration between client and contractor is key. Contractors should be managing their obligations correctly prior to April 2021 and involving, or at least sharing, their employment status decision with their clients. Meanwhile, their client should be using this to help them determine status.
If both parties disagree, there is now time to negotiate a resolution prior to April 2021. To make your case, ask a bonafide IR35 expert to outline what elements of the contract demonstrate the role should remain outside of IR35 and to suggest any amends that can be made to ensure that the contract is compliant with HMRC’s rule(s). Although under the new framework responsibility will ultimately lie with your recruiter or the end-hirer, if they can be assured that the contract has been reviewed by a qualified IR35 adviser, it might give them peace of mind to continue offering the contract on an outside IR35 basis.
We now know with more certainty than we did this time last year what the final off-payroll rules will be and look like. We also now have the hindsight of went wrong over the last 12 months and have an opportunity to do things differently. We may even see some roll back on blanket bans. For the foreseeable future though, the contracting landscape remains in a state of flux and flexibility is the order of the day.
It would be nice to think that the extension to 2021 will allow private sector companies time to ensure clarity and consistency on which roles are inside or outside IR35, but, if the introduction of the changes to the public sector in 2017 is anything to go by, we expect this hybrid job landscape to become the new way of working for contractors and to continue for years to come.