With IR35 set to roll out across the private sector from April 2020, many accountants are becoming increasingly concerned about losing their contractor and freelance client base to the legislation.
The off-payroll rules have not been well-received by the contracting workforce, with some prominent voices in the industry actively campaigning against HMRC’s legislative decisions. Is this concern about losing self-employed business just a knee-jerk reaction to IR35 or is it a valid worry for accountancy firms?
Will accountancy firms feel the effects of IR35?
While most businesses have always needed accountants in some form or another, accountancy services for contractors and freelancers have become much more prevalent in the last 20 years.
AccountingWEB’s Tom Herbert writes:
‘In the late 1990s, changes in legislation and the shifting economic landscape led to a boom in the freelance contractor market within accountancy. Before long a new breed of specialist accounting firm surged ahead of the practitioner pack with efficiently packaged, high-volume, low-priced services.'
'These ‘contractor superfirms’ served thousands, in some cases more than 10,000, clients, becoming household names in the profession and attractive investment opportunities for those outside it.’
Contracting professions have enjoyed a very prosperous couple of decades, as have the niche businesses that grew to service the freelancing population’s needs. However, it’s been widely speculated that contracting in the private sector will be significantly impacted by the 2020 IR35 reform, thus creating a serious knock-on effect for those specialist businesses that cater to the contracting market.
Will IR35 cause a temporary blip or lasting damage?
There’s speculation that accountants could see a drop in their client base by up to 30%, but for Chris Maslin of specialist freelancer accountancy firm Maslins, nothing’s certain. He says on the subject:
‘I’m not necessarily saying the [20-30% drop in clients] is wrong, but surely at this stage, it’s a complete guess. If every end client who uses contractors plays it very safe, the real figure could be far higher than 30%. If they all take a pragmatic view, it could be far lower.’
Mr Maslin focuses instead on those workers that may have been afraid to make the leap from employee to self-employed because of the uncertainty surrounding IR35. He thinks that now the risk lies with the end client, it could actually increase the contracting pool.
‘Remember, post-April 2020 the end client is taking the risk, so risk-averse workers may be more inclined to work via a limited company if the end client is happy it's outside IR35 than the worker would have been before,’ Mr Maslin states.
‘In reality, my view is we’re certainly not preparing to close up shop, but equally, we’re not planning on suddenly diversifying. A bit like with Brexit, it’s a case of just waiting to see how it pans out.’
Like Brexit, IR35 brings mixed outlooks
Understandably, accountants – both sole traders and firms – have expressed uncertain views when it comes to how far-reaching the effects of IR35 will be.
It’s been reiterated across forums and social media that accountants are likely to lose clients under the off-payroll roles. However, those that have paid attention to HMRC’s activity over the last few years may be more prepared, having taken care when accepting new clients and steering clear of any grey areas when it comes to employment status.
Conversely, there are those that believe that accountancy firms and other contractor-specific services are being somewhat underestimated – particularly with Making Tax Digital (MTD) taken into consideration.
Glenn Martin, owner of north east-based firm Avery Martin, says on the subject:
‘Contractor firms are compliance factories driven by process. MTD is a big compliance project. In New Zealand and Australia where they did their version of MTD five years ago, huge amounts of clients were brought into compliance and the number of accounting firms increased greatly.’
‘I think you will find they will adapt to deal with MTD filing if contractors drop off. The next nut to crack will be if MTD rolls out to accounts and non-VAT businesses. Who will do the sole trader taxi driver or window cleaner’s five submissions a year at a price they can afford?’
‘I suspect the online firms are best placed to come up with a system that will deal with this, as already I see many small firms shedding sole traders as the clients no one will want soon.’
Off-payroll rules are nothing new
There’s no denying that the advent of IR35 is daunting. However, HMRC’s IR35 case win-rate (around 17% since 2011) coupled with the fact that the off-payroll working rules are nothing new should allay the fiscal panic a little. Those clients who are genuine contractors will continue to be classified as such, remaining untouched by the private sector roll-out in 2020.
Of course, there’s the fear of blanket determination – and the drop in self-employment seen in the public sector as a direct consequence - to take into account. Currently, the end client only faces repercussion if they wrongly determine a contractor as outside IR35, leaving no incentive to ensure an inside determination is correct. Steps will need to be taken by HMRC to avoid a repeat performance of the public sector IR35 application and the numerous inside blanket determinations suffered by NHS, BBC and, most recently, Network Rail workers to keep contractors in the private sector.
Ultimately, contractor-specific firms will have to be as adaptable as possible in the face of the legislation. If they can continue to service their clients’ changing needs, there’s no reason for them not to flourish.
Additional IR35 advice for accountants
A genuine contractor, freelancer or consultant who is in business on their own account shouldn’t have anything to worry about when it comes to IR35. However, contract reviews are always advisable; whilst you may know that they're legitimate, IR35 determinations are notoriously subjective.
Should you want some peace of mind, we offer a full contract review amongst other services to help you prepare for IR35. We’ll give a pass or fail based on the current contract you hold, along with comprehensive comments on how to improve any problem areas.
We also offer IR35 investigation representation from our Head of Tax and resident IR35 expert Andy Vessey ATT should it go to tribunal.
For any further information or advice, please call us on 01163 800 400 or drop us an email. Alternatively, take a look around our Knowledge Hub for more IR35 advice, industry news and contractor guides.