Off-payroll reality check: What contractors, agencies and clients aren’t getting about IR35 reform
The sort of IR35 off-payroll enquiries currently crossing our desk contain some helpful tips and insights for contractors wondering what they can do now to ensure a smooth transition to the new Intermediaries legislation from April 6th 2021, writes Kate Cottrell of status specialists Bauer & Cottrell.
What are we seeing and who is preparing?
Many large companies made their decisions on IR35 last year, with many having blanket banned the use of limited company contractors.
Many are already prepared but an awful lot (of all sizes) simply ditched their plans, once the 12-month delay to the new rules was announced in March 2020. These engagers are now trying to pick up where they left off with little time left, together with coping with the coronavirus pandemic and all the difficulties it is causing.
Small Companies, Consultancies and Statement of Work contracts
We have been working with lots of new ‘small companies’ especially ‘consultancies.’ Many engagers saw this route as an easy way to circumvent the incoming off-payroll rules, hoping their contractors could simply carry on as before!
This is far from the reality, though. Many organisation have got just about everything wrong, including being unaware of the numerous other rules that will affect them e.g. Intermediary Reporting Requirements, the Agency rules and, above all, where the tax/NIC liabilities sit and what their responsibilities could be!
Following on from this, some agencies have set up a ‘Consultancy’ arm or moved over to ‘Statement of Work’ (SoW) contracts, seeing these routes as the easy option. Both models have their own sets of rules to be properly effective and need careful consideration of all the legalities.
The key message we’d like the contractor sector to receive loud and clear is that you cannot simply change labels without addressing the realities of each situation! For example, turning a ‘time and materials’ contract into one with ‘deliverables and milestones’ is difficult when contractors still need to be paid every month.
With HMRC’s CEST tool being found to be unfit for deciding IR35 status, it seems numerous service providers have invented their own status tools. Some are a very good starting point in the IR35 decision, especially where there are large numbers of contractors to be assessed.
But users of tools need to be satisfied that the underlying in-depth technical knowledge is correct and up-to-date. We are seeing cases where different tools are churning out different results and as with CEST, answers are being manipulated to get the ‘right result,’ which is no good to anyone when HMRC comes calling.
Six tips for contractors who want to get IR35 reform-ready
1. It’s conversation time
For those of you whose contract straddles the old and new rules don’t wait until March or April 2021 or sit back and see what happens! Start talking to your clients and agencies now.
2. IR35 determinations from yesteryear
Do not rely on any IR35 determination given out last year -- before the new rules were delayed. Just because they said ‘outside IR35’ then, they may now have made decisions using different routes or changed their minds.
The opposite equally applies, so establish exactly what information went into the determination, who commented on your day-to-day working practices and ascertain whether they obtained your input. Ask them about their processes of resolving any disputes. Satisfy yourself that ‘reasonable care’ has been taken with your IR35 determination.
3. A ‘Small Company,’ really?
It is not enough to just be told that your provider is a ‘small company’ and you can continue to make your own IR35 decisions!
You must undertake ‘due diligence.’ Always get it in writing from them that they genuinely fall under this exemption, together with how they will notify you if this should change.
Check out Companies House records and especially individual directors to see their other businesses, just in case they are not really a ‘small company’!
4. SoW contracts and consultancies aren’t a magic bullet
‘Due diligence’ is required here to make sure everything stacks up. Beware of labels and if you are really not doing anything differently -- other than that words in your contract have changed -- then be careful before signing.
5. Mindset (and badges of business)
As always think and act like a genuine business. In the same way that you should check out agencies and clients you will be checked out too! If you are aiming for an outside IR35 determination, expect to be asked the likes of:
Why have you not got business insurances ‘yet’?
Why are you ‘still working’ on creating a website?
Perhaps the worst one is when we look at social media sites and find that a contractor who said they've been contracting for many years, but there is no mention that they are a contractor – just a CV linking to your clients, often showing you have risen through the ranks over the years! This strongly smacks of ‘disguised employment.’ Don’t forget, HMRC looks at these sites too!
6. Knowledge is power
Last but not least, seek advice and guidance from everywhere. Check out HMRC’s views, have a play with CEST, or other IR35 tools. Speak to your accountant, keep up with reliable news and expert guidance, and check in with your colleagues. There is also a mountain of free information out there which can contain helpful advice. Even use that mountain to establish the financial consequences of having your IR35 status changed. Whatever you do, do something -- now is the time to be pro-active!