Outside IR35 clues: What clients look for to decide the off-payroll rules aren’t in play
As IR35 reform in the private sector approaches, many contractors feel powerless and concerned that medium and large businesses - who will become responsible for assessing IR35 status from April 6th 2021 - will carelessly and wrongfully place them inside IR35 without much care, attention or sympathy, writes Seb Maley of Qdos.
Of course, it’s no secret that the vast majority of genuine contractors do not want to work inside IR35. If you’re a true contractor, it makes a lot of sense to operate outside IR35, where you are classed as true businesses and can in turn operate with greater tax efficiency.
But while this is well-known, less clear is how businesses are helping contractors work outside IR35. In other words, what are the specific steps taken by firms - often quietly and sometimes even without a contractor’s knowledge - to get contractors the result they so dearly want?
Speaking from experience (we support thousands of businesses with their IR35 processes), here are the hallmarks of a client who is more likely to assess your IR35 position correctly.
1. Less, if any, reliance on CEST
HMRC’s much-maligned IR35 tool does allow for outside determinations, but even so, it’s heavily weighted towards delivering an inside IR35 answer. Paying little to no attention to Mutuality of Obligation (MoO) and heavily reliant on the right of substitution, CEST has – in our estimation -- played a major role in thousands of incorrect IR35 status assessments.
Fortunately, though, lots of businesses, like contractors, realise this. They recognise CEST’s flaws and either refuse to use it altogether or have its answers double-checked by a third-party specialist with a transparent and impressive track record in the IR35 space.
It is these end-users that are much more likely to deliver contractors with an outside IR35 verdict.
2. Case-by-case IR35 reviews
Assessing IR35 status on a case-by-case basis greatly improves the chance of an accurate determination. Contractors should take confidence from clients who take care in assessing status, particularly if these are made following an independent IR35 status review. In contrast, the firms making blanket determinations and, in some cases even role-based assessments, should be approached with caution, as they’re more likely to overlook important nuances in your working arrangements which, if noticed, could place you outside the off-payroll legislation.
3. A clear, coherent IR35 strategy for all to see
For many big businesses - who let’s not forget have not had to worry about IR35 until recently - implementing IR35 reform poses a number of challenges, each of which requires resource, expertise, careful management, communication and often, investment.
Most clients willing to engage contractors outside IR35 understand this and are taking visible steps to implement the right processes, having developed a clear, coherent and steadfast strategy to manage IR35.
This often includes the formation of an ‘IR35 project team,’ the implementation of a transparent process for assessing IR35 status, regular communications with contractors and, increasingly, the support of an IR35 expert to assist and oversee these efforts.
In contrast, the companies with no intention of engaging contractors outside IR35 tend to be those who won’t allocate the time, budget, communication materials or people to any sort of IR35 status-testing project. Often, they will simply ban contractors altogether so IR35 doesn’t apply - a shortsighted and totally needless approach.
4. Communication and collaboration
While not all businesses will involve contractors in the IR35 decision-making process - or even keep them informed about their plans for the changes - it’s something we strongly advise our clients to do. And in our experience, those contractors who are kept updated and receive transparent information regularly from their clients have a better chance of being assessed fairly.
Granted, regular contact from a client won’t necessarily impact the end result, but it suggests that your engager is switched on, willing to collaborate with you and understands how important it is to keep you informed.
5. Preparation, it matters
The 12-month delay to the IR35 changes (announced back in March 2020) was a welcome development. It gave – and still gives -- businesses the time which many of them need to get ready. Preparation is vital and could perhaps even make the difference between a contractor being placed inside or outside the legislation.
Many businesses who are leaving things late, or worse still, don’t get their act together until the very arrival of reform, could - in my opinion - panic and adopt a risk-averse approach to the changes, which sadly is the path of least resistance. Sadly for contractors, it’s also a quick-fire way to you receiving any old IR35 status decision.
6. Remember -- no news can be good news
If, like many contractors, you are yet to have your IR35 status assessed by your client, do not panic - this isn’t a surefire sign that you’ll be lumped inside IR35 unfairly. While some businesses have kicked things off early - as advised - at the turn of the new year in January 2021, we imagine many more firms will start the process. That said, there’s nothing stopping you from contacting your client to find out their IR35 reform plans for your own peace of mind.
Final thoughts (includes you hoping to hear about an audit, not a percentage)
My final advice to contractors is to not assume that due to particular projects, certain skills or specific industries worked in that you’re more likely to find yourself placed inside or outside IR35. Granted, while the financial services sector has taken a particularly risk averse approach to the changes on the whole (as lots of the sector’s firms have banned PSC contractors), we will need to wait until the story unfolds in the coming months, in all the other sectors.
A positive takeaway for now though, is that by and large, in our experience many firms want to retain as many ‘outside’ contractors as they can. It’s rare that businesses will set a target or percentage of contractors that they would like to engage outside IR35. Instead, firms will carry out audits before devising a strategy to ensure the proper processes are in place to compliantly engage legitimate contractors outside the legislation - a win-win for all parties involved.