Contractors, why use a recruitment agency that accepts incorrect IR35 status decisions?
There are whispers in the contractor market that end-user clients are failing contractors, and at times, acting unlawfully, making blanket decisions based on inaccurate information. Can this really be the case, asks Matt Collingwood, managing director of IT recruitment and consultancy services company VIQU, given that off-payroll reform is just 29 weeks away?
Today's IR35 'issues' were always on the Revenue's radar
What’s indisputable is that HMRC foresaw the challenges associated with clients taking on the responsibility of determining IR35 statuses for contractors way back in 2017. So the Revenue developed Check Employment Status for Tax (CEST), which was released in March that year.
They’ve deployed new versions of this online IR35 status testing tool since, to apparently make it even more reliable and capable of determining the correct status for a contractor. Unfortunately, based on what we’re seeing and with a little over six months to go until the new off-payroll rules take effect, it is evident that CEST is still failing all who might need to use it -- the contractors themselves, the decision-makers who want to put such talent to work and recruitment agencies like mine who bring the two parties together.
Since its introduction in March 2017, CEST has been widely criticised – often by IR35, status, tax and legal experts. We’re staffing experts but we see numerous holes in it too, despite the 30-something updates to get it ready for April 6th 2021. Not only does it display an overreliance on substitution -- the idea that a contractor must have a substitute waiting in the wings who will be readily accepted by the client, but it also fails to consider Mutuality of Obligations (MoO). Mutuality can faze the odd newcomer to contracting, but the term simply refers to whether a client feels is beholden to continue giving a contractor work, and in turn, whether a contractor feels is obliged to carry on accepting work from a client.
Interestingly, a judge recently ruled that “the mere offer and acceptance of a piece of work does not amount to mutuality of obligations in the context of employment status.”
Overall, we believe that the HMRC tool is far too simple. It lacks a basic understanding of the unique complexities that arise in the engagement of a contractor by a client. Unfortunately, these oversights can lead to incorrect IR35 status determinations which can leave the contractor feeling bitter. And, in some cases, worse -- it can leave them out-of-pocket.
As an established IT recruitment agency, we pride ourselves on our industry reputation and ability to deliver skilled IT resource to fit the client’s requirement with clear and positive communication along the way. However, since the first tier of IR35 reform in the public sector (effective since April 2017), myself and other members of my team have had disagreements with multiple clients over the determination of contractors’ IR35 statuses.
Most problematically, there seems to be a sort of ‘blanket approach’ that some public sector organisations have decided to adopt to ‘cover’ their organisation against the tax liabilities and other general costs of the new IR35 reforms. We don’t necessarily believe that HR departments are deliberately inputting inaccurate information into the CEST tool in order to have all contractors come out with an inside IR35 determination; but I think a lot of inputs are based on misunderstanding of how IT departments – and their contract workers -- operate.
HR versus IT
A lot of contractors have ‘deliverables’ -- they do a particular task or project and then they move on to their next assignment elsewhere. In the past, we’ve found that decision-makers within IT departments more than understand the way such external operators operate. But when a HR department gets involved, suddenly the contractor needs to be on a payroll!
We should stress that we have many public sector organisation clients that have brilliant decision-makers, and we know of many HR departments which want to make the correct IR35 status determination for each contractor, on an individual basis. However, we have had occasions where an end-user organisation actually no longer wants to work with us -- simply because of the strict stance we have taken to protect contractors and try to get their IR35 status assessed correctly.
For example, earlier this year, we were working with a public sector body on the south coast which decided that one of the contractors we provide was inside IR35. We challenged it and appealed to them with clear evidence to the contrary. The IT manager who wanted to get this contractor on board supported our position. However, the HR department clearly had a narrative that every contractor would fall under IR35, regardless of their individual and actual day-to-day working practices. Fortunately, the decision was eventually reversed. However, the HR department made it very obvious that they would not give us any opportunities or briefs for contractor requirements in the future as a direct result. An expensive price for us to pay for ensuring HMRC rules were reflected and adhered to correctly!
The COVID-19 era
In the past, my agency’s turnover for public sector clients was just 3%. However, when COVID-19 and lockdown hit, we diverted all of our efforts to assist NHS Trusts. Myself and my team focused on sourcing IT professionals who would temporarily volunteer some of their time and talents to help NHS Trusts with various projects until the trust could offer them a paid contract or they found work elsewhere. Since COVID hit, 80% of our new placements have been within public sector organisations, like the NHS.
What’s clear from these statistics is that there are many public sector organisations which are open to making the right IR35 determinations. From April 6th 2021, medium and large-sized private sector businesses will have to start making the same IR35 determinations. This means that there will no longer be an easy way for contractors to avoid the difficulties surrounding IR35 status and decision-making.
Who will you partner with?
So I’d encourage all contractors to partner only with those recruitment agencies which actively show they understand the complexities of IR35 and are happy to push back on clients who make the wrong determinations. Other avenues for contractors to consider include looking for contracts with ‘small companies’ as the IR35 status determination will then sit with the contractor (so there is more opportunity to get it right), and Statement of Work opportunities, though these too need careful consideration from all the contractual parties.