Contractors, UKRI’s £36million in IR35 mistakes will make your private sector clients balk

In light of the latest in a long line of public sector bodies to fall foul of IR35 compliance since it was reformed on April 6th 2017, the private sector should surely be preparing to ensure they don’t end up like UK Research and Innovation (UKRI), writes former IT contractor Patrick Joyce, an independent recruiter and IR35 compliance adviser at Project Scopes.

The revised off-payroll rules have been in force in the private sector for less time -- just over two years now, since they were introduced on April 6th 2021. In the subsequent months, large and medium-sized companies engaging PSC contractors have embedded IR35 processes and procedures into their system management and contractor hiring process. 

A little bit of history set to repeat itself...

Well, I’d urge caution because this is exactly the point in time when the public sector bodies and some central government departments – i.e. those who have fallen foul of IR35 -- felt comfortable with the implementation of their own processes.

While implementations in the government sector were relatively solid and end-to-end processes got established, the latest estimate for the public sector is that it has now incurred a combined bill of up to £300m for getting IR35 wrong. The whole point those processes were meant to avoid from happening.

The long and short of it is that implemented off-payroll/IR35-compliance processes are a ‘false positive’ unless they are:

  • understood fully;
  • consistently matched to contractors’ actual working practices;
  • monitored by independent parties/sources; and;
  • documented along the way.

From what I’m picking up at present, most of these crucial factors were neglected in the public sector, leaving huge gaps and IR35 cases for HMRC to investigate.

Has your client dropped the IR35 compliance ball?

The private sector should note well that despite adhering to all advised procedures with valid paperwork, IR35 compliance was put in place at the beginning of the journey in the public sector. But it can take a sharp decline once contracts are in play.

This happened in the public sector and the fear now is that organisations, regardless of sector, will continue to be financially hit by HMRC in this manner, likely to include penalties, for dropping the ball on IR35 compliance once contracts got underway.

Remember, paperwork with specific clauses geared towards B2B but later found out to be inside IR35-based practice can be considered fraudulent, leading to additional fines on top of any backdated HMRC penalties.

It is inevitable that history will repeat itself in the private sector, albeit at a much higher cost to companies that won’t have a public department to subsidise their budget.

Tools aren't the trouble

At the time of writing, IR35 assessment tools often used to produce IR35 status determinations receive a lot of flak, particularly as the public sector experience sees these tools tied up with HMRC investigation issues.

However the tools themselves aren’t the trouble. Whether the assessment is automated, reviewed manually or is a hybrid (of the two), the data output onto a Status Determination Status report is only as good as the data input. Who inputted the data, and how the data got inputted is still unfortunately a mixed bag in the private sector. The problem is this -- many companies consider this phase of contractor hiring as a time-delaying aspect, and so it’s not considered in the correct manner -- at least not consistently.

For a genuine IR35 status assessment, all relevant parties should be involved. That means engaging in discussion during the initial B2B meetings, where contractors discuss the project(s) with end-clients. These meetings are still referred to as ‘interviews,’ even though they are not interviews. And this term unhelpfully indicates employee-employer status.

Formed from an understanding that is agreeable with all sides, the SDS report which contractors ideally want to obtain is created from this meeting, and if ‘outside IR35’, the project delivery methods, report details, and legal contract should be in alignment.

Corporations -- tomorrow's public sector bodies and departments, surely

Unfortunately, this is not the case with a significant percentage of contracts in both the private and public sectors, with the latter currently generating headlines of public bodies handing HMRC money for non IR35 compliance. It’s hard not to see headline-writers just soon needing to swap out the names of departments and bodies for the names of companies and corporations.

Off-payroll non-compliance being extended to the private sector is all the more likely because contractors at almost all levels -- expect for the very senior -- are still treated like just another member of the team, often throughout end-client departments. While this integration can be considered good for morale, it’s strongly advised against in terms of IR35 compliance. This is not me advocating treating contractors in a poor manner, but rather I’m recommending understanding and acknowledging the classic three-tier contracting scenario of contractors being a formal external company, that are enlisted for part of an interim project, where they as a provider deliver against an agreed schedule.

For this to play out more widely, internal communication and education programmes are required. The goal should be not only to update (public or private) departments but to disseminate this scenario through any Comms and Monitoring channels. To the rushed commercial engager, this may seem like an arduous and repetitive task, but it’s maintaining consistency and best-practice like this that will save private companies millions in the long run -- and keep all options open to working with the best talent on the market.

The Revenue likely waiting for the revenue opportunity to mature

Currently, this understanding and acknowledgement is in place at a very small percentage of medium-sized and large companies, as most believe their compliance cycle completes upon sight of an ‘outside IR35’ SDS. Unfortunately this is the beginning of the downward spiral.

You might ask yourself why there aren’t many off-payroll investigations within the private sector, yet, for medium-sized and large companies.

Before you answer wrongly, remember a lot of information has been requested from private firms of their contractor workforce over the past 12 months. This data will undoubtedly be put to good use -- but by the tax authority too. In addition, if you were HMRC, why would you cash in on fining private firms for, say, just two years non-compliance -- when you could wait and fine them for multiple years in sequence?

I’m referring to the equivalent of waiting for a large interest saving scheme to mature. There is no point in taking it out early. I would suggest that this is what we are seeing -- right now --in the public sector (where HMRC demands like UKRI’s £36million runs as far back as 2017/18 when the rules were introduced). And we’ll see the same in the private sector.

Indeed, not only is it inevitable that we will see a comparable pattern in the private sector for IR35 status but there will be several layers of complexity. In short, that outsourced term which many clients initially thought rescued them, could be there undoing in the near future.

Beware the agency's bolted-on consultancy arm

For the uninitiated, I’m referring to the hundreds if not thousands of companies that have handed their IR35 compliance requirements to third-party consultancies in terms of project delivery. By ‘consultancies,’ I mean agencies which, prior to April 6th 2021 bolted on a consultancy arm to their offerings. The idea was that this offering was not one of resource but of ‘service provision,’ whereby the third-party would take the project on and deliver it independently, through use of contractors hired for specific projects. The agreement in play points towards an ‘outsourced service,’ seemingly shifting the IR35/off-payroll responsibilities and liabilities away from the client. In reality, the simple truth is resource is still being supplied to end-clients (as per previous), but it’s just now termed and documented as something else. This practice is rampant in the current contractor market -- and despite what some providers may claim, the end-client will ultimately take the HMRC fall in the long run.

So, if you are a company that is running a project with contractors on board but have outsourced documentation in place with a third-party, reviewing this set-up is critical for compliance accuracy. While ‘Outsourcing’ and ‘Statement of Works’ are not new concepts, if SOWs have been introduced to address off-payroll/IR35 compliance since April 6th 2021, it’s extremely important to re-review this to display what is really occurring. That’s probably the best preparatory step to take right now if there is a future letter in a brown envelope on its way which will make unpleasant, taxing reading for end-clients whose pockets won’t be anywhere as deep as UK Research & Innovation’s.

Profile picture for user Patrick Joyce

Written by Patrick Joyce

Patrick Joyce is a former IT Contractor who, for over 20 years now, has assisted companies in the resourcing of interim IT contractors for projects by reviewing specifications at a technical and business level to match requirements to suitably skilled contractors.

Patrick undertakes hands-on management and ongoing auditing of all IR35 compliance aspects for all parties (End Clients, Fee Payers, Contractors), in the supply chain including Status Determination Statements (SDS).

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