Contractor Survival Guide to IR35 Reform
The public sector reform of IR35 in April 2017 was preceded by widespread uncertainty, which led to fear and knee-jerk reactions.
With potential private sector IR35 reform on the horizon, many are fearful that the same thing will happen in the coming months, writes Graham Fisher, chief executive of Orange Genie. So, is there anything you can do now to protect yourself?
Don’t panic, but do act -- now
The prevailing opinion may be that private sector reform of IR35 is now just a matter of time, but that doesn’t mean we’re recommending that you just knuckle under and accept it. It’s vital that all stakeholders continue to make the argument against a repeat of the public sector fiasco and point out the unintended and unfair consequences of the 2017 reforms.
However, it is wise to prepare for private sector reform now (the earliest floated start date is just seven months away), so if or when it happens you’re best placed to ride the reform waves.
In some ways, the contractor sector is in a better position than when it was facing the-then unknown public sector reforms last year. Assuming the reform is simply rolled out in the same format, we at least know what it looks like, as we have experience of the impact and an understanding of behaviours. Importantly, we also have time. We’re not saying you can afford not to act -- far from it, but measured, useful action is the order of the day. Acting now gives you the best chance of resolving any issues before they become urgent, and securing your position ahead of any reform.
Understand your status
The first stage of any plan if you’re a PSC with a private sector client is to understand your position. It’s always been sound advice to understand your IR35 status, but it’s even more important in the context of looming reform. Whether you’re inside or outside, you should know why and be happy that you can evidence your position. You should be gathering evidence (and confirming arrangements) whenever possible to support your status.
IR35 is extremely complex, and in fact this is one of the most common complaints raised by its critics. Because of this complexity, we’d advise any contractor working through a limited company to get a professional IR35 review from a specialist. A clear, independent ‘outside’ assessment could prove extremely valuable, while an ‘inside’ assessment could save you a great deal of trouble in the long term. A good IR35 specialist will be able to explain the reasons for their assessment, and recommend any possible action to strengthen an ‘outside’ position.
HMRC’s online Check Employment Status for Tax tool (CEST) has been widely criticised, and at the moment there’s no requirement to use it, or to accept the result if you do. However, it’s possible that your end-client and/or agency will insist on using it, and that they’ll act on what it tells them.
It’s therefore sensible to know what result it gives you now. Even if reform is announced from April 2019, you still have at least six months to review your CEST result and see if there is any action that can be taken with regards to your contract and working practices that will mean you 'pass' the test. Remember, HMRC has said they will stand by the result of CEST so an 'outside' IR35 result is a very valuable piece of paper.
If you’re clearly inside IR35
It’s possible that your independent assessment will reveal that you should be working ‘inside’ IR35 and that this cannot be easily changed. If this is the case, it’s vital that you find out now and take actions. Should your ‘inside’ status be revealed by a client’s assessment after reform, it could leave you vulnerable to HMRC investigation, and this could prove very expensive. If you find yourself in this position, you should seek professional advice as to what you should do with your limited company.
Collaborate with your client and agency
It’s not just contractors who are fearful of the looming changes. End-clients are also concerned about the potential impact on productivity and their profitability. They appreciate that they need to secure talent and to control costs, so they will be keen to ensure that the correct status decisions are being made.
It is important to collaborate with your supply chain at an early stage i.e. now. Talk to all parties and see how they intend to approach any potential reform. Blanket IR35 decisions are not deemed as ‘reasonable’ in some clients’ eyes (not just contractors’), and an 'inside' decision can be inconvenient and expensive for them -- and the agency as well. So it’s not in the interest of these parties to treat you as ‘inside' IR35 when you’re not.
If you have assessed your status and obtained your evidence, you can work with the supply chain to ensure that your status is correctly assessed.
Statement of Work arrangements
Many agencies and end-clients are exploring the option of offering contracts on a deliverables basis. There will be an increased use of ‘Statement of Work’-type arrangements, where contracts are offered for a specific project, with set milestones and deliverable dates, triggering stage payments. This kind of contract is more likely to support an ‘outside' IR35 status than the traditional time-based contact with a set day rate. Would this arrangement work for you? Is your client or agency planning to move you onto one? Or, are they ruling them out entirely?
The earlier you talk to everyone involved, the more options you will have. And the better reception you will likely get too.
Further concerns (check back to allay them)
There are other concerns PSC contractors have (or should have) as Autumn Budget 2018 approaches with the potential to extend the April 2017 off-payroll rules to the private sector, such as being forced ‘inside’ IR35 when they're clearly not; what to do with their PSC and whether there are other ‘alternative’ solutions contractors should consider. These will be explored in part two of this guide, alongside a ‘checklist’ of five actions we recommend you should take as a bare minimum, ahead of the potentially biggest change to IR35 since its introduction almost two decades ago.