IR35 – Delayed; but not forgotten

Yesterday (17th March 2020) the Government announced that they would be postponing the rollout of IR35 changes into the private sector due to the Coronavirus outbreak.

Despite the Minister referring to ‘off roll payroll working rules‘ (maybe indicating that he has no real idea what they are) he confirms that the changes will be tabled again ready for implementation in April 2021.

This comes far too late for many genuine contractors and associated services such as accountants who have had to close their businesses down as clients imposed blanket bans or ‘Inside’ determinations requiring the engagement of Umbrella companies and significant reductions in income.

It also comes the day after HMRC provided evidence to the House of Lords and were found seriously wanting in their response to scrutiny. While the House of Lords cannot force Government to defer the bill we have to hope that this contributed to the decision to pause the rollout (regardless of what they say).

The #StopTheOffPayrollTax campaign has been very active on Twitter and in organising a march on Parliament – but it appears that it took the Global Coronavirus Pandemic for the Government to realise that the proposed implementation and it’s consequences were out of step with the rescue packages it had announced for ‘regular businesses’, i.e. not the self-employed.

Many people think that it’s just IT Contractors that were going to be affected but it soon became clear that the flexible workforce is woven throughout our society. From the hospitality sector to veterinary surgeries, from the NHS and pharmacies to driving instructors. As the extent of the impact became more widely understood the noise started to grow.

But when Dr Iain Campbell started to highlight the strain that the draconian changes to the IR35 legislation would bring to the front-line NHS staff treating those infected with the Coronavirus did things become very real indeed.

So What Now?

Well we are not out of the woods yet – not by a long shot.

In the above video clip the Government confirm that this is a delay and not a cancellation of the changes being rolled out into the private sector.

So, despite all the evidence the Governments standpoint is remains that;

‘People doing the same job should be taxed the same way’

The UK Government and HMRC

Apparently this is regardless of the fact that they will not receive the additional benefits that the tax contributions buy their employed counterparts, e.g. statutory sick pay.

The last few months has been a stark warning that unless the legislation is changed or proper guidance is provided to end-clients then we will be in the same position twelve months from now. Teetering on the edge of a flexible workforce implosion.

I think it’s far more likely that nothing will change from the Government apart from a renewed desire to get the changes implemented – so it’s down to the end-clients to get up to speed with the ins and outs of IR35, unless they want to see contractors walking off site in their droves (and they will – that’s been shown!).

Working Outside IR35 is not (in my opinion) that hard and by making very few changes to working conditions most (but not all) of the roles determined to be Inside can easily be moved Outside IR35- and in a manner which can be defended if need be.

The problem is that end-clients don’t understand IR35 enough to be able to say with confidence that the legislation does not apply to a role. This is further compounded by the fear that HMRC will come after them for tax which is deemed to be unpaid should they disagree with the employment status determination.

It is this fear that has left the flexible workforce facing extinction – being forced to make a choice between contract termination or being ’employed for tax purposes’, but not for employment rights!

But the onus doesn’t lay solely with the end-clients – we, the flexible workforce, need to take these twelve months to help them understand what Outside IR35 means and why we are so important to them.

And it’s not only the end-client that needs to be brought up to speed.

We all know that there are contractors out there who are operating contrary to the legislation (knowingly or otherwise). They need to be educated as to how to operate in a compliant manner or called out as a disguised employee.

Me

People are on Twitter claiming victory but we are a long, long way from winning!

The Government seem to accept that the changes were going to have a massive negative impact on a large number of businesses, otherwise the suspension of rollout due to the ‘ongoing spread of Covid-19 to help buinesses and individuals‘ would make little sense.

If they are set on this course of action then the flexible workforce and the end-clients we offer services to need to be ready for the changes which seem inevitable.

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.

IR35 – Living with a Broken Promise

Well I guess it’s old news now, although it was quite foreseeable, but despite a pre-election promise the Conservatives have reneged on their commitment to review the IR35 legislation. Instead they will review the process for rolling the changes into the private sector – not the same thing at all.

Instead of me going over old ground, take a look at my previous IR35 post which was published prior to the election (and it’s broken promises).

In the weeks that have followed Twitter has been ablaze with tweets tagged with #IR35 – many are mine. There is a lot of anger out there and our worst fears, that end clients would take the ‘easy option’ and just stop using contractors altogether has come to pass (despite HMRC saying it wouldn’t).

Take a look at the OffPayroll.org.uk site and you’ll see the extent of the problem that is unfolding.

Many contractors are being let go and the work is being farmed out overseas. Those clients choosing to keep their flexible workforce are either making blanket assessments that all roles are ‘Inside IR35’ (as they see it safer that way) or using the HMRC CEST tool with limited understanding on how to answer the questions it asks – this will normally result in an ‘Inside IR35’ determination.

Many will point at the CEST results and declare that most historic roles should have been deemed ‘Inside IR35’ so the system is working correctly and that we have all be fleecing the system for years.

There is no doubt that some contractors, knowingly or otherwise, have been operating on the wrong side of IR35 – it would be foolish of me to say otherwise. But why is it that whenever a minority are found to be bending or breaking the rules everyone has to suffer the consequences?

So where does that leave me?

Well, I guess I’m lucky in that I’m in the process of securing a role with a client that will be exempt from the changes – they are a start up and satisfy the ‘Small Business’ definition. This means that I’m responsible for making the IR35 determination. I’ve discussed this with the client and they am not an employee and that I’m providing a service via a business-to-business arrangement.

The project involves the development of a viable proof of concept and the contract will last 6 months.

Maybe the dust will have settled a bit by August 2020 and clients will realise that banning PSCs or imposing blanket ‘Inside IR35’ decisions isn’t working for them.

I’m sure that the government (small ‘g’ was deliberate!) won’t have changed their stance – they will more than likely spin whatever happens to their advantage, that’s what they do.

But it all comes down to this – what happens if, when this contract comes to an end, all the suitable roles are ‘Inside IR35’? What will I do then?

Well, it’s simple – if I cannot find an ‘Outside IR35’ role or secure a role with an exempt company, I’ll have to look for a permanent role instead and to close down my Personal Service Company.

I will not work ‘Inside IR35’ as a ‘No Rights Employee’ – period. It won’t happen, ever!

Dave Carson (On The Fence Development) January 2020

This would be a shame and frankly it makes little sense for the government (small ‘g’ is deliberate remember) to stand there and accept that.

I pay more tax as a contractor that I would as a permanent employee – many contractors are the same. So by forcing us out of business there will be an inevitable loss in revenue – where is the sense in that?

IR35 2020 – Thoughts from the Coal Face

I’ve been contracting for over eight years now and in that time I’ve been careful to ensure that, to the best of my abilites, I operate in a manner that places me outside of the IR35 legislation. That is, to provide a service to my clients and not to be seen as an employee.

Currently it is my responsibility to determine the employment status of a role with regards IR35. I do this by having contracts independantly reviewed to ensure that they comply with the legislation and take steps to ensure that the actual working conditions are in accordance with service provision rather than employment.

If I get it wrong then it is down to me to justify my determination, in court if need be, and pay any unpaid taxes should I be unable to do so.

However, in April 2020 that determination could largely be taken out of my hands and placed in those of the fee payer, e.g. the client if I’ve been engaged directly or otherwise a recruitment agency that have facilited the engagement.

HMRC have decided to make this change stating their belief that most contractors are incorrectly self-declaring themselves as being outside of IR35 and avoiding paying the correct level of tax.

They have not been able to substantiate these claims, despite repeated calls to do so – but that’s not the reason for this post.

There are a number of problems with this, seemingly subtle shift in responsibilities but, as I see it, the main one that a great many end clients have no concept of IR35 or how to interpret it. Until now they’ve really not had to worry about it – the contractor turned up, did the work and left again. The client paid the contractors Limited Company or the recruitment agency an agreed fee and life was simple.

From April 2020, fee payers that meet the size and turnover criteria will need to determine whether IR35 applies and is so deduct tax as source prior to paying the contractors company. However, the IR35 legislation is complex and confusing – with HMRC losing more cases than it wins it is clear that they don’t fully understand it either.

If, in the eyes of HMRC, the fee payer gets the IR35 determination wrong and have deemed a contract to be outside of the legislation instead of inside then they will be responsible for paying the overdue tax – which may not be trivial. So what do we think clients are going to do? Are they going to invest the time into understanding IR35 so that they can defend and ‘outside’ determination or just take the ‘easy’ route?

Well, in spite of HMRC saying it wouldn’t happen, many major clients, particularly in the banking sector, have already stated that they will either not be engaging with contractors after April 2020 or will be considering ALL contract positions to be within IR35. That way they will stay on the right side of HMRC and everything is simple again.

The problem is that while HMRC may be happy with this, afterall they will be receiving additional revenue from these blanket IR35 determinations, many contractors are not.

Without getting into the nitty-gritty of IR35 it is not easy to see the problems that this will create for contractors but I think that there is an opportunity to educate the clients here. To make them aware of the difference between contractors, who provide a business-to-business service, and their permanent employees.

Provision of Services – A ‘Tradesperson’

First of all imagine that you run a company and want to freshen the office up a little bit.

You contact a decorating company and explain your requirements and agree on a price and timescale for the work. The company duly send a suitably qualified decorator to your site, you tell them what you want done and they get on and they get on and do it.

When they are done they leave and if you are happy with the work you pay the invoice.

So, what have you done here?

You have engaged with a company to provide you with a service. They have sent one (or more) of their employees to carry out the work and then invoiced you for that work.

The key here is that the company has provided you with a service – you have not directly employed the person who arrived to do the work. You don’t need to pay their taxes or into their pension. If they are unavailable the company can send someone else, suitably qualified of course, to continue with the work.

If the work was scheduled to take a week and it’s finished in three days then you are not obliged to provide additional work to fill the time – and neither is the decorator or company obliged to accept it if you do. The engagement was for a set piece of work and once that is done the engagement is over.

Now, I think that’s pretty straightforward and nobody should have a problem with that. But the thing is that the provision of service is somewhat clear cut; you have engaged with a company who provide services that your company is not skilled in.

Provision of Services – Contractors

Imagine now that you run a company which has a Software Development aspect to it and you need some additional resource to fulfil a project on time.

You reach out, directly or via an agency, to a company providing contracted software development services, explain your requirements and agree on a price and timescale for the work.

The contractor arrives on site, is told what needs to be done and gets on and does it.

Once the work is completed there is no expectation that further work needs to be offered or accepted and the engagement is over.

During the engagement should the contractor fall ill there is no expectation that their services will be invoiced unless they are able to send a suitable replacement (at the contracting companies cost) to continue with the work.

Does this sound familiar? It should do – it’s pretty much the same as the previous example with the decorator.

The difference is that the service being provided is something that your company already does and the contractor is probably expected to work within an existing team.

This is where the lines start to blur and the grey areas start to appear.

Why does this make a difference?

With a contractor more embedded in the business and it’s team it is easy for the client to see them as an employee and attempt to treat them as such.

I’ve had instances where a client will attempt to dictate my working hours (despite working a standard 7.5 hours) and my dress code (I was wearing a polo shirt with my company branding).

Would the client feel able to do this with their decorator? I think not.

If they arrive at 9 and leave at 3 but get the work done to the required standard and complete the job on time then surely that’s what matters. If the quality isn’t there or the job isn’t finished then that’s another matter altogether.

The client wouldn’t expect to be able to dictate the dress code for these external workers, or when they take their lunch breaks so why expect to do it with a contractor?

I may well sound like a bit of a diva here – I mean, who do I think I am? But this is the reality of the matter. The client has engaged my company, directly or indirectly, to provide a service – I am not their employee.

Now, in order to integrate into a team a contractor will normally work similar hours but their hours should only really be dictated by their ability to access the building (assuming they are working on site).

I will obviously make efforts to integrate with the team and working conditions but this is in order to maximise the value of the services I provide – I’m kinda old school like that.

The Take Away

I believe that unless clients can understand this concept then they will have little chance of being able to make an accurate determination of employment status.

If they see contractors as employees, albeit temporary, then they will simply not grasp the importance of determining an accurate employment status with regards IR35.

It may well be that a particular role is correctly deemed to be within IR35 and if this is the case then that’s fine.

However, clients should avoid taking the stance that all contracts are within IR35 – doing so will not only damage the contracting industry in the UK but the client will also severely hamper their ability to engage with an experienced, temporary and flexible workforce to delivery their project and products.