IR35 and the Implosion of the Contracting Market

When I checked Twitter this morning my heart sank – I was watching the new Chancellor (Rishi Sunak) regurgitate the HMRC view of IR35 and the changes to be rolled out into the private sector in April.

He was essentially announcing the Death Knell of Flexible Working as we know it – the contract market will shortly implode even further than it already has.

We, the contracting community had hoped that the fresh faced minister would pause the roll-out and call for the review that was promised ahead of Decembers election.

Instead he stated “it’s not fair to all the people who is employed that someone else who is doing the same job is paying less tax” – the cornerstone of the HMRC argument for making the changes.

On the face of it that may be a reasonable stance to take – but they are not comparing apples with apples here (and they damn well know it).

While we make be doing the same job we are engaged on a very different basis.

We have structured ourselves to operate as service companies to offer clients a flexible resource as and when they need it for as long as they need it (and no longer).

Notwithstanding the fact that contractors are not entitled to sick pay, holiday pay, pension contributions and other benefits such as professional development (training), gym membership and health insurance. Sure, not all of these are covered by the tax & National Insurance they pay but the overall package makes them an employee.

Add to that the notice period that they benefit from, normally a month but can be more, and the fact that even if there is no real work for them to do their employer is still obliged to pay them for turning up. Even if they ‘let them go’ they would have to pay them for their notice period (and any untaken holiday pay!)

Contractors normally have very short notice periods, if they have one at all, and their contract can be terminated at anytime for just about any reason – there is no guarantee of work (and no expectation of it – that’s the life of a contractor).

So, what’s changed?

IR35 itself – the legislation (as complex and unfit for purpose as it may be) – will not change. Determinations on employment status will still need to be made with reference to this legislation.

What’s changed is who makes that determination after April 6th 2020.

Since it’s introduction around twenty years ago, it was the contractors responsibility to determine their employment status. If that determination indicated that the role was Inside IR35 then they would be liable for the payment of tax as if they were an employee. If it was Outside IR35 then this did not apply.

With the benefits of being Outside IR35 pretty clear cut – most contractors preferred that arrangement.

The problem is that some contractors were not as diligent (or just blatantly avoiding paying the additional tax) and declared themselves as being Outside IR35 when the contract and/or working conditions didn’t support that determination.

HMRC claims that as many as 9 out of 10 contractors are operating in this manner – but have not be able to substantiate this claim. The generally accepted figure is less than 30% of contractors are declaring themselves as being Outside when their working conditions are such that they should really be Inside.

So, in April 2020 HMRC will require the end-client to make the employment status determination instead of the contractor.

What could go wrong? If the end-client is using the same, unchanged, legislation as the contractors have been for years then surely this will put things right …. won’t it?

Well, along with the responsibility for making the determination comes the responsibility for getting it wrong. By wrong I mean making an ‘Outside’ determination which HMRC later decide should be ‘Inside’ (they won’t be interested in the other scenario).

Should an end-client incorrectly determine a role to be ‘Outside’ then they will be responsible for paying the tax that HMRC deems to be owed – which could be thousands of pounds here.

That’s the kicker here..! Companies are generally risk averse and locking horns with the taxman is something they would quite rightly want to avoid.

Companies have looked at their contractors and thought – “if we get it wrong and have to pay back-tax for them then is that a risk that we can sustain?”

The answer in most cases is, understandably, No!

Despite claims (lies?) by Finance Minister Jesse Norman in the House of Commons that it’s not happening, many companies are making blanket determinations that mean either:

  • They will not use contractors in anyway shape or form after the changes come into force
  • All roles will be deemed as Inside IR35 regardless of the outcome of a proper determination.

Many contractors are being walked out of the door by shortsighted clients fearful of HMRC while others are being told that they can stay only if they move to being ‘Inside’ (taking the tax hit in the process – for no perceivable benefit).

What are the implications?

This clearly shows a misunderstanding of the legislation and flies in the face of requirement for due diligence on a case by case basis that was assured (and even required by HMRC).

But just think about it for a minute – what are the implications of moving from being ‘Outside’ to ‘Inside’ with the same client? What is that actually saying?

Surely that indicates that, assuming the role hasn’t actually changed, the contractor accepts that they had previously been working on the wrong side of the legislation and is therefore liable for the tax they will now be deemed to have avoided as a result. Who in their right mind would sign up for that?

HMRC have apparently said that they will not investigate the retrospective status of contractors making this move from Outside to Inside – but after everything that’s gone on in the past few months, why would we trust them? Are they really saying that they would ignore cases of potential tax fraud?

Now, not all companies are making this blanket determinations – some are actually doing it properly and you can use the OffPayroll.org.uk website to see who is doing it right and who is not.

How’s the future looking?

If I’m being honest, as it stands right now, I’m not that hopeful. The House of Lords is conducting a review of the impact of the changes but I’m not sure what they will conclude. Even if they agree that the changes are excessively damaging I’m not sure whether they can actually call a halt to the roll-out or just make a recommendation.

It is clear that the government (small ‘g’ is intentional!) is going to plough ahead with the change – regardless of the evidence that it may mean that a significant number of contractors will be forced out of their current engagements and maybe have to close their businesses down. No doubt they will claim that these people were operating contrary to the legislation and that the changes have been successful in their aim.

Fortunately I’m currently engaged with a small start-up company which will be exempt from the proposed changes – so the employment determination remains with me.

I’ve had the contract independently reviewed and it has come back as being Outside IR35. The client is aware of IR35 and are happy for me to operate in a manner that will demonstrate that I am indeed Outside.

In a couple of months I will draw up a Working Conditions Declaration for the client to review and sign. This will help support the ‘implied contract’ concentrating on how the services are being provided and how they differ from employment.

The contract should run for another five months (but may finish earlier – I’m a genuine contractor remember) and when it concludes there is no obligation for the client to offer another (or for me to accept it).

So my hope is that, in the four months between the changes coming into place and the contract ending, clients will see that blanket determination and bans are not working for them and that the contract market is in recovery.

Failing that I will have to hope that I can secure a contract with another ‘small company’ where I will be responsible for my employment status determination or that a larger client is engaging with contractors and operating in a fair with regards IR35.

If these things do not come to pass then I will, with a heavy heart, have to close my business and look for a permanent position instead. My income will be lower and my flexibility will be gone but I will have employee benefits and paying the tax to ‘earn’ them.

Taken as a whole the taxes that HMRC will receive from me, i.e. personal and corporation, will be reduced as a result. With the stated intention of these changes being the increase of revenue this kind of flies in the face of what will actually happen.

There is still time for the government to delay the roll-out (maybe based on the outcome from the Lords, maybe common sense will prevail) – but all we, the Flexible Workforce, can do is watch and wait as nobody is listening to us.

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