The IR35 reform has coloured contractor news since the public sector rollout in April 2017. It’s generally accepted (by everyone bar HMRC) that this reform did not go particularly well, and you’d be forgiven for thinking that the private sector reform is going the same way before it’s even officially begun.
While 6th April 2020 is still months away, many large corporates in the financial and pharma sectors are pre-empting the changes in legislation and liability by taking ‘risk-averse’ measures. It began with HSBC announcing a cull in limited company contractors, which was quickly followed by Morgan Stanley, and M&G Investments. More recently, Barclays and Lloyds have taken the softer but still contractor-averse stance of pushing all limited company contractors to PAYE. GSK and other pharma agencies are also rumoured to be going to the same way before January.
Why have so many banks taken the risk-averse route with IR35?
It’s a question that’s been asked across the industry; with every new company that joins the ranks of risk-avoiders, the contracting community becomes a little more disheartened. Is it to do with costs? Perhaps a lack of understanding surrounding the legislation? Or is it simply short-sighted laziness on the companies’ part?
The biggest IR35 threat to medium-large sized businesses and, incidentally, the biggest cause of blanketing is that end-clients will become liable for their contractors’ employment status come April 2020. It’s a sticky situation for many, and it’s often unclear on what the best way to proceed is. The immediate kneejerk reaction by many large corporates – in particular, HSBC, Barclays, Lloyds, Morgan Stanley, and M&G Investments – has been to push all contractors to PAYE or stop engaging them completely. While this is certainly the most direct and risk-averse route to removing any IR35 concerns, it’s a myopic business move that eradicates specialists and flexible workers in one fell swoop, both of which are intrinsic to most modern business models.
The debt transfer provisions aspect of the reform is also something of a worry for businesses. Should the fee-payer (whether that’s the recruiter or the engager) not pay the correct NI and income tax deductions after a contractor is caught by the legislation, then this debt could fall to another business in the supply chain to shoulder – whether the status determination was their responsibility or not.
Cost and publicity implications of preparing for IR35
Andy Vessey, ex-Qdos IR35 specialist and current Larsen Howie Head of Tax, has heard speculation that a lot of the decision making in this area is to do with avoiding the cost of hiring a Senior Accounting Office, or SAO, to deal with the implications of IR35.
“I am not persuaded that these decisions are motivated by avoiding hiring an SAO unless the implication is that these financial institutions consider the ‘off-payroll’ rules an unnecessary inconvenience that they just can’t be bothered to engage with,” he says. “In which case, I believe that opinion is credible.”
“It is more likely that the reason is media-related,” Vessey continues. “Speaking to a well-respected agency recently, their understanding is that the reluctance of these banks to engage PSCs in the future is driven by not wanting to receive adverse publicity for getting status decisions wrong and being taken to task for such. Whatever the reason, I think it’s a lazy approach. Such a policy should not be endorsed. These bankers are not trying to sidestep the reforms but rather avoiding them altogether.”
Why culling contractors isn't a risk-free way to deal with IR35
The likes of Barclays, Lloyds, HSBC, Morgan Stanley, and M&G Investments who’ve announced a limited company contractor cull could well be shooting themselves in the foot. By taking such a stance, they’re ultimately directing highly skilled contractors to competitors who are willing to embrace the IR35 reform. The medium-large companies that are willing to work with contractors to legitimately preserve their self-employed status will enjoy the cream of the crop with little competition, resulting in coups that could prove business-defining for certain underdogs in the financial and pharma world.
“Rumours of a contractor mass-exodus had been circulating even before HSBC officially announced its IR35 position,” Vessey says. “Experienced, talented contractors will have little problem taking their services elsewhere. Many of these contractors will have worked with the banks for several years, taking with them in-depth technical knowledge of programmes and processes. Not only will this be difficult to replace but it could prove a threat to the likes of Lloyds, Barclays, and HSBC as a business - particularly if those same contractors are approached by a similar business willing to apply the off-payroll rules correctly.”
HSBC, in particular, retracted some of their badly-worded initial statement. They suggested instead that they were looking into alternative routes around IR35 like service providers, which would effectively shift the liability down the supply chain. Vessey doesn’t think this method will be the shortcut the banks are looking for, though.
“If the banks do point contractors in the direction of a contracted-out services provider, then they will have to be certain that they are happy to relinquish control of project work to that third party and that the contingent workers are not personally providing their services to HSBC,” he says. “If not, they will find they still need to consider the off-payroll rules anyway.”
Will private sector contracting be affected by IR35?
Despite all the bad press surrounding IR35 and the general treatment of the self-employed by the government in recent years, the April 2019 employment figures show that the self-employed sector has grown by 76,000 in the last year. From specialist project management through to aiding with particular aspects of IT transformation, organisations will always need to draft in additional help. However, it’ll take work from clients, recruiters, and contractors to preserve this smarter way of working in the face of IR35.
We asked a contractor (who wished to remain anonymous) with over 30 years of self-employment under his belt what needs to change for self-employment to weather the reform.
“As a chartered building services engineer of 30 years’ standing in the construction industry, I know that we – both contractors and clients - are dinosaurs to change,” he says. “We have seen leaps and bounds in technology and communications, but working practices have yet to catch up. Working remotely for example; I accept that if I don’t do the job I don’t get paid, but clients often still have the antiquated view that we should be in the office with them.”
“Clients cannot expect a 40-hour week commitment from imported, skilled labour and badly need educating on this point,” he continues. “Client education is key, and corporates and multi-national companies should be accepting the change of working practices and multi-client concept.”
“I have been having this discussion for months when receiving calls for work and some still do not even comprehend the issues. I have an instance where a company had high-paid lawyers write my contract, yet it still failed an IR35 test when put through review.”
It seems that a good portion of the blanketing decisions made by large corporates does indeed stem from a lack of understanding when it comes to the legislation - whether this ignorance is wilful or not is up for debate. Businesses should invest in IR35 consultancy and seek out guidance resources (of which there are numerous) before April 2020 to retain their invaluable contractor workforce.
What can businesses do to prepare for IR35 without blanketing?
Charlie Cox, Commercial Manager of international staffing company Sthree, is vehement on the subject of blanket employment status determinations and the ongoing private sector contractor cull.
“If you or your organisation are thinking about determining that all of the contractors who supply services through a limited company to your business will fall within the Off-Payroll Working rules (you consider them all to be Inside IR35), you absolutely should not do this,” he says. “Not only is it illegal, but it will also not likely be an accurate reflection on the actual status that should be applied and is also not treating each assignment individually, as you should do in line with the legislation, taking reasonable care.”
“It has been communicated since the Public Sector reform in 2017 that reasonable care must be taken by the end client when making an IR35 determination,” he continues. “To do this, end clients should assess each assignment on a case by case basis and not make blanket, or business-wide decisions.”
There are many things that businesses can do to proactively prepare for the IR35, however, including identifying the number of workers who currently operate via a PSC or limited company, determining if IR35 applies to any contracts and working practices that extend past April 2020, and assessing arrangements involving complex labour supply chains. Talking to contractors about where they feel they sit in accordance with IR35 is also something that shouldn't be overlooked; developing a communications plan is crucial for making sure everyone involved understands the legislation and its implications.
The most important thing to remember when preparing for IR35 is that collaboration is key. Make sure to maintain good communication during the whole process and encourage openness throughout the supply chain to minimise the potential for any nasty surprises while maintaining – or even building on – trusting business relationships.
What can contractors do if they’re not happy with the way a company approaches IR35?
Although HMRC has indeed said previously that blanket determining – or any lack of ‘reasonable care’ taken when it comes to employment status determinations for that matter – isn’t compliant, it seems that said corporates are taking that route without consequence currently. There is strength in numbers and, should an indispensable workforce stand together to make an organised complaint about the way IR35 has been approached, they’re more likely to be listened to.
That said, it would take an enormous amount of organisation and coordination to pull together an action group even in one workplace, let alone across an industry, unfortunately rendering it a somewhat unrealistic solution. Many contractors may also be too scared for their income to fight the decision, and some will likely accept the decision and simply put their rates up to compensate for the said loss of income.
So what can contractors do right now to help themselves in the face of IR35? We go back to our contractor for some practical advice.
“Ensure you can prove that you are not exclusive, first and foremost,” he says. “It’s also important that you control your working diary, that you keep thorough, up-to-date accounts, and accept remittance advice only based on invoices submitted as opposed to self-billing. Last but not least, put the effort into bidding for more than one job at a time; while you might not be successful in even half the jobs you go for, you’ll have documents that say that you tried – which could be potentially case-winning proof that you are not beholden to one single client.”
How Larsen Howie can help you prepare for IR35
Should you want some peace of mind, whether you’re a contractor, recruiter, or end-client, 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 held, along with comprehensive comments on how to improve any problem areas. Additionally, we 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.