One month in, and IR35 reform has unleashed a new world of dilemmas
There are still numerous cases out there where, despite HMRC’s concentrated publicity drive, many individuals and businesses are unaware of the new off-payroll working rules, even though they took effect on April 6th 2021.
And of those who are aware, there are many who do not understand the processes they need to put in place and to adhere to in order to demonstrate they have taken “reasonable care” and to protect their businesses. A very worrying aspect is that many see the new rules as a one-off exercise, rather than an ongoing requirement.
These are the current dilemmas facing each party
In short, and regardless of contractual party, it’s a case of RISKS, Risks and more risks!
Contractors are having to grapple with incorrect Status Determination Statements; needing to decipher what the rate really is; assessing the merits of continuing with their limited companies; exploring what it means to go through an umbrella company; determining if the client is a 'small company'; working out if the ‘consultancy’ really is a ‘consultancy’ (not an employment business); identifying the actual end-user/client; gauging if the overseas rules are in play; completing IR35 tools including playing with HMRC’s CEST tool; deciding if a Statement of Work contract solves everything; carefully reviewing all the new indemnity clauses in contracts to discover who is liable and responsible for what; weighing up whether IR35 insurance is a good idea; evaluating the HMRC risk to their businesses following an IR35 status change.
And? You need more?! Okay, and if all that wasn’t all enough, ascertaining what the risks to their livelihoods and impact on their families will be for making the wrong decision in any one of the above far from straightforward tasks and dilemmas.
Recruitment agencies have had even more dilemmas since April 6th than contractors including adhering to numerous other legislation e.g. Agency rules, Criminal Finance Act, MSC rules, and Money Laundering.
They have to endure the balancing act of keeping their clients and their contractors informed and happy. Oh, and answering a pretty long list of difficult to answer questions.
Should they create a PSL (Preferred Supplier List) of umbrella companies? Should they outsource their payrolls? Do they need an IR35 tool? Do they need to rewrite contracts to deal with the new rules? Are their indemnities fair?
Most importantly, how are they managing their responsibilities and liabilities as a ‘fee-payer’ under the new off-payroll legislation? And what about the associated risks to their businesses, and their families?
Bonafide umbrella companies currently face similar dilemmas to agencies. In addition, are they operating correctly in the eyes of HMRC? Even if they are, should they pay thousands of pounds to be audited, or to join some sort of membership body?
Recent bad press on the umbrella structure, featuring numerous parties calling for formal regulation of brollies, may mean a change in operating methods. Is your umbrella ready for that? What will the consequences be; can the umbrella absorb further costs, and how will it mitigate the potentially significant risks which may lie ahead?
These businesses are often seen as a simple solution to the new IR35 rules by being a ‘small company’ but they can be fraught with potential problems. For example:
- turning time and materials contracts into genuine outsourced services;
- the potential for the consultancy to also be acting as an employment business;
- creating contracts correctly, and related;
- understanding and implementing all the responsibilities, liabilities and risks of being a ‘fee-payer.’
The dilemmas for end-users include dealing with contractors that have been with them for many years (outside IR35), and finding out they are clearly disguised employees but are essential to the business.
Other quandaries for clients include being inundated with salespeople touting workable and non-workable solutions to IR35 reform; their need as an organisation to get up to speed with all things IR35/off-payroll, and the urgent need to understand their responsibilities and risks while simultaneously making accurate, robust commercial decisions that will last and stand up to scrutiny.
Perhaps the biggest dilemma for accountants currently is a significant loss of clients, especially those practices which specialise in contractors.
Many others are faced with disgruntled contractors who have never taken their IR35 position seriously and are blaming their accountant for their current position.
The same issues arise for accountants dealing with the myriad of legislation that exists. A key issue is the MSC rules and the interaction with IR35 insurances. Some practices felt they had no option but to create their own umbrella companies, or partner with other parties to protect their own businesses and income.
All the parties affected by the new rules expect their accountant to know and understand the rules and the risks and provide robust advice, or at least to be able to refer clients to a specialist.
These range from creators of some dubious status ‘tools,’ and the person in HR who got the short straw, to the many sales teams and many new ‘specialist’ companies, all of whom are not to be confused with those advisers who have been successfully dealing with IR35 and defending cases under the legislation for more than 20 years.
All such experts (qualified or not) are facing the risks associated with their own lack of understanding of IR35, including not always knowing how HMRC deals with IR35; the significance of HMRC guidance, the penalty regime, the knowledge of and interaction with all the other legislation that affects an opinion of IR35/off-payroll status, and all the associated risks.
Above all, the key question for contractors enlisting them to ask is -- do the processes and procedures undertaken by your ‘expert’ adequately demonstrate that “reasonable care” has been taken?
There is lots of good news too
As you can see, all parties in the contractual supply chain are facing genuine dilemmas and significant threats. Yet with appropriate help and support, these obstacles can be overcome and the risks mitigated. Knowledge, as always is power.
Another positive is that everyone is gaining a greater understanding of the new IR35 rules -- and this includes HMRC. Things are beginning to settle down with clients making proper assessments, some consultancies are being correctly formed, incorrect SDSs are being overturned and many agencies, umbrellas, accountants and IR35 specialists are doing an excellent job informing and helping everyone.
Just like with the advent of the April 2017 off-payroll rules for the public sector, we are now seeing a move from a knee-jerk reaction to the April 2021 rules, to sensible, evidence based compliant practices.
There is still a huge demand from hiring companies for contractors, and as long as contracts and working practices demonstrate an outside IR35 position, plus a proper assessment, fees do not need to change. In this way, the requirement to take “reasonable care” can be both met and plain to see. So correct decisions can be made and where this happens, the risks for businesses and families will be mitigated.