Doing the off-payroll rules right: meet the companies correctly assessing contractor IR35 status
Even before the government’s promise of a ‘soft-landing’ for the incoming off-payroll rules, one contractor took to LinkedIn to say she was totally fed up with clients being “cowardly” – not assessing IR35 status fairly.
Now that soft-landing is here almost, many contractors are apparently hoping that the 12-month period will result in more William Hills, Eurostars and Bayers – just three companies widely known to be IR35 testing PSCs on an individual basis, taking “reasonable care.”
Proper IR35 reviews: an introduction
In this article, exclusively for ContractorUK, we’ll meet a few other companies that are meeting the letter of the law from April 6th, and its spirit, by offering a proper IR35 review per PSC providing services.
And perhaps more importantly, writes Matt Tyler, IR35 consultancy manager at Larsen Howie, we’ll reveal their motivations too, in the hope that other engagers reading this will want no truck with a ‘cowardly’ reputation.
No lumping please, we're individual professionals
In the words of a boss of a head-hunter-style staffing agency we spoke to for this piece, “The working arrangements, tasks and responsibilities will vary from contractor assignment to contractor assignment.”
So “instead of organisations lumping all their limited company workers in together and applying a blanket assessment – which risks being unlawful,” the boss says, “each contractor assignment and working arrangement needs to be take into account individually.”
Not everyone agrees, of course. Only this week, Bill Dodwell, tax director at the Office of Tax Simplification told the House of Lords Finance Bill Sub-Committee: “If you engage several hundred, several thousand contractors, then any engager, whether public or private sector, is bound to have a limited number of contractual models it will use. It won’t have literally an individual one for each one of them, so having some form of blanket assessment, I think, is fairly inevitable.”
Our head-hunter recruitment source, so someone who is at the coalface of recruitment, isn’t convinced. “Sorry,” he says, “but you might have two software developers working for an organisation and the right of substitution may be contractually different for each of them – meaning, potentially, that one role falls inside IR35 and the other doesn’t.”
A divert here to HMRC’s official guidance may be helpful. The Revenue specifies that ‘reasonable care’ should be taken when end-users assess whether contractors sit inside or outside IR35. Engagers then have to prove how they came to their decision in a Status Determination Statement. So they best do it right first time – or it could cost them considerable time, hassle, and money in the long run.
Not just a tax/cost issue, as Skanska knows
But end-users do actually have more to consider when weighing up their IR35 risk than just potential tax costs (as significant as they are). They ought to imagine their very best talent going to their competitor because that competitor is carrying out fair and proper IR35 assessments. And those contractors could defect (and are defecting in some cases) with the years’ worth of knowledge about their original engager’s company, its culture, processes and systems. We wonder how many engagers have worked out just how much such defections could cost their commercial operation, in financial, knowledge, training and reputational terms.
Many end clients are taking the time to keep their contractors on-side for this exact reason and Skanska, a Swedish-based construction and development company -- the fifth largest in the world, is one of them.
Advocating the case-by-case, contractor-by-contractor IR35 testing approach, the multinational says: ‘We’ve been working with a recruitment partner to ensure that Skanska applies IR35 in a fair, consistent and compliant way for workers who could be affected by this legislation, due to become effective in April.
“Status assessments are well underway for our temporary workforce, and also for new assignments that are being reviewed and underwritten by an IR35 specialist.
“This individual approach ensures that Skanska does the right thing by our workforce, and that we continue to attract and retain top talent to help us build for a better society and ensure continuity for our clients.”
Treat contractors like people, not just ‘resource,’ like Quanta does
Skanska’s position on the off-payroll rules (outlined by one of its top-brass online), is refreshing because it’s easy for central or upper management team to forget to have compassion for those who are directly affected by their corporate strategy.
Of course, managing risk is a large part of any healthy company’s growth. But the IR35 reform is a particularly sensitive topic that’s impacted limited company contractors across the UK. This is mainly due to these very knee-jerk reactions from medium-size and large commercial organisations, in the shape of short-sighted, risk-averse, premature ‘blanket’ determinations. In short, improper IR35 assessment, appearing lax of “reasonable care.”
A staffing agency, Quanta Consultancy Services, wants no truck with such an approach and told us it has even set up a steering committee to ensure case-by-case IR35 assessments are taken seriously, for the good of its business, its clients and its contractors.
“The main benefit of really putting the time in to understand the legislative changes and creating a plan of action for both our contractors and our clients in regard to determining statuses is that it minimised disruption to both projects and contractors’ livelihoods,” the agency says.
“[For us], an automated tick-box exercise is not fit for purpose for the whole self-employed workforce [we provide], and therefore insufficient to determine status. [Instead we have partnered] with a dedicated IR35 specialist to complete our reviews, specifically due to their experience with HMRC tribunals as well as the utilisation of case law.”
Why proper IR35 assessment can look off-putting
We should acknowledge that a contract or working practices review carried out by an IR35 specialist will likely take longer to conclude than a quick play about with CEST. But the results will be far more reliable, and contractors are usually happy to wait as long as they are kept in the loop and communicated with regularly. Engagers who take this tailored, manual, IR35 determination approach also have direct access to the specialist that carried out the review, meaning that they can ask any questions they may have about the results and how they may affect the organisation.
It’s reassuring that this thinking is now taking firmer root in some parts of the public sector. An agency in the healthcare market, for example, who went with CEST says: “We are engaging people in the public sector on contracts outside of IR35.
“As long as the contracts are sound (we use the REC-approved contracts) and the client has run the HMRC tool correctly, then there is no question to ask.
“Project managers and programme leads alike should have no issue as long as the right to substitution is discussed and agreed. Defined scope for delivery, which is understood by client and contractor, is the key.”
We need more Worleys, more Just Eats
We believe that the more outcome-focussed private sector should, theoretically, be conducive to truly outside IR35 contracts, and matching working practices, being drawn up and stuck to. And we’re not the only ones.
Fair and proper IR35 assessments for the reasons outlined here – ranging from wanting to avoid unnecessary tax and cost to keeping hold of talent to avoid project delays and even penalties, are additionally in place at engineering services giant Worley, and online food retailer Just Eat. Hopefully more clients will now be chomping at the bit to meet their legal obligations (“reasonable care”) and do right by their contractor workforce, thanks to the cushion of a ‘soft landing.’ At the very least, it should put a spring in the step -- not that they should need it.