What contractors endured in the first month of this new off-payroll rules minefield

Today, exactly one month after the application of IR35 reform in the private sector, and the contractor market is turbulent, writes Helen Christopher, operations director at Orange Genie.

Three outcomes

Ahead of the April 6th off-payroll rule changes, a significant number of end-clients took the decision to ban the use of PSCs and many, for now at least, remain steadfast in their position. Even where end-clients are prepared to engage with Personal Service Companies, some contractors found themselves presented with inside IR35 determinations immediately after the April 6th deadline, with little time to appeal or look for an alternative contract.

The result has tended to be one of three outcomes. Some unwanted time ‘on the bench,’ direct employment with the end-client, or employment through an umbrella company. Outcome two happens even at those end-clients who are still only just waking up to the fact they need to do something about IR35 changing!

Limited choices if you don’t agree

Meanwhile, for those contractors vehemently disagreeing with the stance taken by their end-client, choices are limited. Those who have received an inside assessment have a legal right to appeal, but this appeal will be heard by the same parties who made the original assessment in the first place, which presents an obvious problem.

Where clients have made a policy decision to ban PSCs, there is no right to appeal. Here, affected contractors must choose whether to accept the decision or leave their assignments. Faced with this position, many seasoned contractors who are blessed with the luxury of a war-chest and are used to sometime between roles have left assignments on principle. The hope for this group is that end-clients will begin to feel the impact of losing their flexible resource and will think again about how they can engage compliantly with PSCs.

Hoping history repeats itself, or just giving up the fight

Our experience in the public sector suggests this is a realistic hope, but only time will tell how many end-users will re-think their approach. For now, there are certainly far fewer outside IR35 contracts on offer, from what we are seeing day-to-day, one month since the reforms came into force.

I mentioned ‘bench-time,’ describing it as unwanted. Well, not everyone can afford to take time out, and we have seen a significant number of contractors reluctantly accept the choices offered by their end clients. For some the acceptance has been a matter of necessity while for other contractors, there is a real sense of weariness and of giving up the fight, because they believe it’s impossible to win.

Worrisome, challenging times

So up close, what are these choices? Potentially worryingly, we have seen a rising number of contractors accept permanent positions with the same end-client that they were engaged with on an outside IR35 basis. In some cases, they are even undertaking identical tasks and roles to those they invoiced for the previous week! So some commentators might start to wonder whether HMRC has a point when it says that a large number of contractors are indeed disguised employees. 

However, the overwhelming result of IR35 reform early last month has been a huge increase in interest in umbrella companies. This has presented challenges for umbrella companies, recruitment agencies and contractors alike.

A quick Google search will return you a long list of umbrella companies that contractors can choose from, but that same search will also highlight the negative headlines umbrellas sometimes generate, notably in the run-up to April just as contractors would have been giving them a serious look.

Compliant or not?

Inevitably with reform or a rule change comes ingenuity, and the market is now hosting new models, touted as ‘solutions’ to IR35 reform. Unfortunately, many of these solutions are non-compliant and will fall foul of anti-avoidance legislation, meaning despite the potential short-term benefit of higher take-home pay for workers or contractors who join them to avoid IR35, the immediately reduced costs will pale into insignificance once the long-term costs from HMRC, including investigations bite. These tax-related costs can be significant.

For this reason, along with recruitment agencies’ desire to ensure they mitigate their risks in the supply chain, we are seeing more and more the importance being placed on well-managed Preferred Supplier Lists (PSL). Contractors can be confident in their choice of umbrella company when presented with a PSL by their agency, since every listed umbrella will have had to meet multiple criteria from proving compliance to meeting certain financial requirements. Otherwise, they would not have gained a place on the list.

Your steep learning curve as a PSC going brolly

But potentially uncomfortably, for many new umbrella contractors, it will be their first foray into the world of brolly employment. Indeed for some former limited company contractors, it could be the first time they have ever been employed on a full PAYE basis. This change in status -- from company owner to employee -- is bringing with it a steep learning curve. While trading through a PSC the contractor will have been used to absolute autonomy in what they do, including in negotiating contracts, they now need to adjust to being an employee.

This transition to a role carrying much less autonomy is evident in the volume and nature of the questions we are being asked surrounding employment contracts and contractual supply chain. Fundamentally, the relationship with the contractor has changed. As a PSC they will have developed a relationship with an accountant that enables them to receive ongoing bespoke advice about their business and financial situation.

Whereas under an umbrella contract, the relationship is very different -- being one of employer and employee. While staff and representatives of the brolly should be available to answer all that new employee’s questions surrounding the employment, inevitably contractors are having get used to a different style of relationship.

The devil is in the detail, but it also contains an elixir

That said, it is fair to say that most contractors understood that operating inside IR35, or no longer being a PSC, was going to lead to reduced take-home pay. But perhaps what many did not completely appreciate was how their income would be calculated by their umbrella (their new employer), concerning the monies paid to the umbrella by the agency or end-client. A frequently misunderstood element of the calculation is who pays the Employers NI and this continues to confuse contractors.

Granted there is a lot going on, but contractors have to remember that in the same way they had costs to cover before extracting funds from their PSC, their umbrella also has costs of employment that need to be paid. Some of these employment costs would have been incurred by the PSC, such as Employers NI, but others such as Apprenticeship levy may be less familiar. A detailed pay illustration from a good umbrella employer should explain everything – from the reconciliation statement and the assignment rate to the contractor’s gross pay, along with the Key Information Document (provided by the recruitment agency).

But what is happening to PSCs where contractors have jumped to an umbrella because of the April 6th rule changes? Well, in some cases contractors remain hopeful they can find outside IR35 contracts, and that they will be able to trade as a bonafide business again. In the meantime, we are seeing an increase in the use of ‘switch’ services, whereby contractors can easily switch between umbrella and PSC, depending on their current contract. For those contractors who have decided to leave their PSC behind for good, they are behind the sharp increase in the level of company closures and a spike in associated tax planning advice.

For the road ahead, get (further) equipped for the minefield

Unsurprisingly the first month after reforming IR35 has been full of uncertainty and questions. Despite being handed both time to prepare and HMRC-issued guidance, it is clear that many parties in the supply chain were either not ready for the April 6th launch, or simply chose to try and avoid the changes by banning PSCs.

It’s likely to be many weeks or even months before everyone in the supply chain settles into the contracting world’s ‘new normal’ on the IR35 front, whatever that may be. In the meantime, we can expect contractors, agencies and end-clients to need continued support as they navigate what is nothing short of a minefield.