What’s being done right now to manage private sector IR35 reform

After the government seemed to all-but rule out a delay of private sector IR35 reform upon the launch of its review into the controversial changes, contractors are bracing themselves for April 6th, writes Seb Maley, CEO of status advisory Qdos Contractor.

Where we are now, as IR35 reform nears

It’s not difficult to see why contractors are so concerned about IR35 reform. Many independent workers have already experienced the mistakes made in the public sector, while it seems others are considering forming or working through ‘consultancies’ and drawing up a Statement of Work as a workaround to the changes.

Meanwhile, negative goings-on around reform, such as blanket inside IR35 decisions, outright bans and ‘go PAYE or go home’ ultimatums, will continue to dominate the headlines. That’ll probably be the case right up to reform day.

But there are many end-clients who will be ready to assess IR35 status accurately, upon or soon after the introduction of the changes. All they need now is that elusive final legislation and, given HMRC’s clear inability to provide proper support, advice from IR35 specialists.

A missed trick?

As you read this, you might be wondering why the companies that will soon assess IR35 status and the fee-paying agencies that find themselves caught up in the changes aren’t making their positive intentions clear. After all, this would be a certain way for these parties to gain a competitive advantage and attract contractors, would it not?

In my view, yes, indeed it would. However, there is a nervousness among private sector firms to make their plans public – even if they are positive.

We are, for example, yet to hear any shouting from the rooftops from engagers who will assess all their contractors as outside IR35 - regardless of the fact that even this approach risks mistakes.

Given HMRC’s current attitude towards tax compliance, I get the sense that businesses are worried about sticking their head above the parapet. And of course, a number of companies that intend to assess their contractors’ IR35 status fairly might not yet have started.

Nonetheless, based on the more than 100 private sector firms and recruitment agencies we are professionally assisting, we are confident that plenty of businesses will be prepared for April, assuming the government is blinkered enough to plough on and enforce these changes.

Here’s what some of those companies are actively considering:

• Collaborative IR35 decisions

Many companies set to be ready to engage contractors compliantly outside IR35 by April have opened up a dialogue with their contractor workforce -- some many months ago. By consulting contractors (and agencies where they are in the chain), in relation to setting IR35 status, private sector engagers have a better chance of making the right IR35 decision, naturally. Collaboration matters, and this is something companies employing a measured approach to reform have a strong grasp of.

• A pragmatic view of reform

Businesses ready for IR35 reform are being pragmatic about the situation. Like contractors, they do not want the changes to be enforced. They don’t want the administrative burden and HR headaches, nor do they want to carry the IR35 risk.

But the firms that are more likely to cope with these changes are realistic about the predicament. These companies are giving IR35 the proper time and resource it deserves because they understand the value of compliantly engaging contractors outside IR35.

• Less reliance on CEST

HMRC’s IR35 tool simply isn’t up to scratch. It never has been, and I highly doubt it will be capable of providing reliable information even after the IR35 reform review. Tellingly, the companies that we advise have either stopped using CEST altogether or are no longer relying on it. A refusal to depend on the Revenue’s tool means that any engagements passed through CEST then get double-checked with a full IR35 status review. This way, contractors have their tax status set carefully and accurately. For companies, they themselves can be confident of their IR35 compliance. Many are also no doubt aware of the ‘public sector experience’ of CEST at the NHS and others – get fined by HMRC for using CEST incorrectly.

• IR35 insurance

This April, the IR35 liability will transfer from the contractor to the fee-paying party in the supply chain, which will either be the agency or the client. Therefore, fee-payers are protecting themselves with IR35 insurance for any assessments that sit outside the scope of the legislation. In a nutshell, insurance gives end-clients the confidence to make outside IR35 determinations, while also safeguards fee-paying recruitment agencies.

• Statement of Work

There has been talk that private sector engagers are agreeing Statement of Works with agencies and sometimes contractors, which is happening to an extent. In short, a SoW is typically in place between a consultancy and a client, outlining project deliverables and costs, timeframes and activities. A SoW negates the need for an IR35 assessment by the end-client given that it will be the consultancy or provider of the service that decides the IR35 status of contractors.

This does come with a caveat, though. The services which the consultancy provides must be genuinely outsourced. A SoW cannot be a provision of labour disguised as a consultancy agreement designed simply to sidestep the rules. HMRC will likely be paying close attention to what appears to be hastily cobbled together ‘consultancy’ arrangements. For contractors considering forming a consultancy, there’s also a number of other financial compliance issues to take into account –- it’s certainly not a straightforward undertaking.

That said, end-clients are open to the idea of a Statement of Work, although to reiterate, for it to be compliant, there must be significant changes to the way a contractor or contractors provide a service to that business.

Final thought

With the IR35 changes approaching rapidly, there are many private sector engagers that intend to carry on using contractors outside IR35. Granted, those doing the ‘right thing’ aren’t as vocal about it as those preparing to force contractors onto the payroll. However, more tangible than any soundbites, through our work alone, we expect tens of thousands of outside IR35 opportunities to still exist after April 6th.