How IR35 reform is landing with contractors' end-client organisations

It’s been almost five months since the new IR35 off-payroll working rules came into force.

Not an easy task, regardless of sector

The public sector have had a few years head start but, along with the private sector, are now having to acquaint themselves with the Status Determination Statement and the Status Disagreement Process, as HMRC does it rounds. It’s not an easy task for end-users!

And I predominately work with companies that want to establish that their contractor workforce are genuinely off-payroll, writes Rebecca Seeley Harris of ReLegal Consulting.

So, I haven’t been involved with companies or organisations that have made ‘blanket’ decisions or, in fact, just made a business decision that they will no longer work with limited company contractors (also known as Personal Service Companies). This non-engagement with limited companies is approved by HMRC as legitimate and, however illogical it appears, does not constitute a blanket decision.

Off-payroll progress, now at an amber light

My clients, in both the public and private sectors, have been faced with a mountain to climb to establish compliance and ensure that it is not just a ‘one-off’ exercise, and that compliance is ongoing. 

It may be that a contractor is ‘off-payroll’ on day one but, a couple of renewals later when compliance has slipped, might mean that they have moved into the ‘on-payroll’ category.  Compliance has to be continual.

Along with making sure that contracts are drafted correctly and working practices are congruent with those terms, I also have to grapple with the clear and present threat of ever-changing case law.

At the moment, the PGMOL case is waiting for the judgment from the Court of Appeal but, even with that judgment, it is very likely that the case will be appealed to the Supreme Court by the losing side. That means we will not have a clear position for at least another couple of years.

Various other cases are being ‘stayed’ pending the outcome of the PGMOL case and some industries are particularly reliant on the outcome of the Mutuality of Obligations argument (which is at the centre of PGMOL). Employment status is a particularly unstable and unsatisfactory set of rules for companies and institutions to have to work to but, unless we have a statutory test, we have to work with it.

Public sector paying HMRC, but not after sole reliance on CEST, surely?

In the public sector, the existing IR35 rules have been in force since April 2017, but these rules have now been reformed by the April 2021 off-payroll framework for the private sector.  As ContractorUK reported, HMRC have been busy in the last couple of years, pursuing other government departments and have raked in over £130m in back taxes – and from just three departments.

It has also been widely reported that these government departments used HMRC’s CEST tool to establish the employment status. It is highly unlikely that these departments only relied upon the CEST output to make the determination, or if they did, then that is their first error.  Every organisation affected by IR35 is required to have an understanding of employment status or to hire a professional. The employment status assessment and subsequent decision is a significant one which can cost many thousands (or millions) of pounds if end-users get it wrong. So using a simplistic tool to establish status in isolation is a bad business decision and unlikely to constitute ‘reasonable care.’

SDS, contractor identity, and where agencies could step up

The new Status Determination Statement (SDS) is causing multiple problems in trying to identify who the contractor is and whether they are indeed a limited company worker who needs to be provided with an SDS.

If the contractor is working through an agency and not direct, the client very often doesn’t know where their resource is coming from, and are often just given an individual’s name by the agency, rather than the company name. This, in itself, doesn’t help with the argument of personal service and substitution which is the bedrock of employment status.

Along with this issue, sometimes the agency contracts are incorrect. For example, a contract that is for an ‘agency worker’ claiming that the agency will make deductions for tax is obviously an incorrect contract for a limited company contractor that is outside IR35.

So, it is very difficult for clients in the public sector, and now the private sector too, to make valid judgments for employment status where they are given the names of individuals, and not the company name, and incorrect contracts. 

Assignment schedules -- have you got yours in place?

Another area of concern if we all want to get IR35 compliance right is that where companies are using a large amount of contractors, they are all sometimes recruited en masse for an overall project, rather than being recruited individually for specific tasks. 

So, along with the contract being incorrect, there are no assignment schedules. Each contractor should have a body of work that is documented in an ‘Assignment Schedule’ that they are to complete under the project they have been hired to work on. If there is no ‘Description of the Services,’ how can you answer questions relating to whether you can be moved from task to task, if it is not known what tasks it is that the contractor is completing!

My advice to contractors is, therefore, to make sure that they have a description of the services and tasks that they are engaged to complete and that this is conveyed to the end-client. The labour supply chain is complicated and the client is now having to grapple with status determinations for multiple contractors and the risk of getting it wrong for the client is, in some cases, a tax risk that could bankrupt the company. That may go some way to explaining why some companies are (still) particularly averse to using off-payroll contractors.

The future (in a nutshell, case law will be king)

As I stated at the outset, compliance is an ongoing and continual process. That means all parties in the labour supply chain need to work together to ensure that the contractor is genuinely off-payroll. I doubt there will be any legislative changes affecting IR35 now or at Autumn Budget 2021 (even if that becomes Budget 2022 in March) so, case law will be the game-changer, especially where mutuality of obligations is concerned.

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Written by Rebecca Seeley Harris

Rebecca is a leading expert in ‘employment status’ and IR35 and the law involving independent contractors and the self-employed for the purposes of tax and employment law. Rebecca has run her own consultancy for the past 20 years covering all employment status issues such as off-payroll in the private and public sector, otherwise known as IR35, s.44 and any issues affecting the self-employed and personal service companies.
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