Category Archives: IR35 & Contracting

IR35 & Contracting, News

IR35 one year on : How companies can eliminate the risk

Written by Martyn Valentine, co-founder and Chief Legal officer of IR35 Pro

 

One year on since the major reform to the Off-Payroll legislation for the Private Sector in April 2021 (more widely known as IR35), we can see it has caused chaos for hiring companies, recruiters and the contractor community.

But did you know it’s possible for hiring companies to engage self-employed contractors without the risks?

Since becoming a qualified Legal professional in early 2000, I’ve dedicated the past 15 years purely to IR35, immersing myself in the complexities of the legislation. I’ve worked with over 2,000 Clients, drafted over 6,000 IR35 contracts and successfully represented clients in over 100 HMRC IR35 enquiries.

It’s evident the Private Sector is yet to get to grips with IR35, a slow painful transition. HMRC themselves anticipated that two thirds of self-employed contractors would remain outside IR35, unaffected by the changes, however, the reality is too many companies have initially taken an overly risk adverse approach, restricting their use to a bare minimum and in some cases eliminating them entirely.

This is already proving an expensive and unsustainable approach, as the flexible workforce is integral to the success of any major business.

Research from The Association of Professionals and the Self-Employed (IPSE), highlights that self-employed contractor numbers have reduced by a third since April 2021.

Contractors have seen their income drop by around 30% when engaged inside IR35, leading to many to leave the profession for permanent roles with greater job security and employment rights. This supply and demand headache has led to swathes of contractor vacancies and significant project disruption.

All of this is avoidable if IR35 is managed correctly, including eliminating the risks.

 

IR35, a problem worth solving

 The IR35 reforms actually present a real opportunity for companies to adapt and gain a competitive advantage.

Engaging contractors inside IR35 is estimated to cost hiring companies 25% more than they were previously paying. These costs are a combination of day rate inflation, significant employers’ taxes and workplace pensions.

To offset this cost increase, some companies have tried lowering the gross pay rate offered to the contractor, absorbing the employer costs within their original budget. This has proven unworkable, assignments are less attractive, directly impacting the calibre of applicants for any role and the client’s ability to retain them. Additionally, contractors who have historically worked on assignments outside IR35 are also now reluctant to take roles inside IR35 to avoid attracting unwanted attention from HMRC.

However, the converse is also true. If you adapt to working with self-employed contractors outside IR35 compliantly, there are significant benefits to be enjoyed.

While many companies are paralysed by the perceived risks of engaging contractors outside IR35, this is primarily due to a misunderstanding of the legalities.

It is no different to any other area of Law, if you don’t have the depth of legal expertise required you are going to leave yourself unnecessarily exposed. It’s too complex an area for companies to manage themselves. IR35 hinges on 20+ years of case law, constantly evolving, it’s too complex for a novice to be expected to apply correctly.

 

Hiring companies can eliminate IR35 risk if they take two simple steps

The positive news is that IR35 can be effectively managed and de-risked for hiring companies, enabling them to engage self-employed contractors without the concern of liabilities. There are two steps to achieving this:

  1. Satisfy HMRC’s requirement for ‘reasonable care’ with their management of IR35
  2. Ensure a 3rd Party always pays the Ltd contractor, even if you hire directly.

 

Step 1: Satisfy HMRC’s ‘reasonable care’ requirement

If you satisfy ‘reasonable care’ with the management of IR35, you pass the risk and liability of working with contractors outside IR35 to the ‘Fee Payer’, which is the company that actually pays the contractors’ Ltd company. Often this is the MSP or a Recruiter, but there are also companies that offer an affordable solution for all contractor payments, whether inside or outside IR35.

 

So what is reasonable care and how do you satisfy it?

Both the HMRC Employment Status Manual (ESM) and case law indicate that for reasonable care to be satisfied, IR35 must be robust and consistently monitored throughout the assignment. it is not sufficient to rely on software-based Status Determination Statements (SDS), an example of this are the recent penalties received by Ministry of Justice and Defra, having relied on CEST for their assessments instead of using expert guidance. The SDS is only the starting point, the assignment must be closely examined for material changes, potentially requiring a re-assessment and revised paperwork.

My experience of managing HMRC IR35 enquiries consistently confirms that the focal point is always the contract, statement of work and the working practices. The SDS is not relevant if it doesn’t align with reality, a situation that all too frequently occurs as the answers can be manipulated to achieve a desired result.

A simple solution is to engage qualified IR35 legal specialists to support the management of each  IR35 assignment. HMRC explicitly state in their ESM manual that ‘using a professionally qualified advisor’ constitutes reasonable care. Once you’ve satisfied reasonable care, if you want to eliminate IR35 risk you need to take step 2.

 

Step 2: Ensure a 3rd Party always pays the contractors’ Ltd company

If you’ve satisfied reasonable care, you are now able to pass the liability and risk over to the Fee Payer, assuming there is one in the supply chain, likely a Recruiter or MSP. If you are engaging a percentage of your self-employed contractors directly, consider introducing a third party to pay them for you. For a modest cost, you can pass all IR35 risk across to them. If you opt to pay the contractors ltd company directly, you will retain the liability as you remain the fee payer.

 

The time to adapt is now

In reality, there is no significant IR35 risk to pass over If IR35 is managed correctly. Implement expert-led assessments, robust contracts and a change control monitoring process, and there will be no scope for challenge. It’s inevitable that some roles will always require inside an IR35 classification, however If HMRC anticipates two thirds of contractors should be working compliantly outside IR35, companies should be seeking the expert help and guidance to achieve this as the benefits are unquestionable.

It can also be risk free.

For the detailed legal explanation on how your company can eliminate IR35 risk, click here: https://ir35pro.co.uk/eliminating-the-outside-ir35-risk/

 

About IR35 Pro

Martyn Valentine is the co-founder and Chief Legal officer of IR35 Pro, a unique fully managed service for IR35 that takes responsibility for the entire end-to-end process. Using their workflow software, they manage contractors for clients of all sizes, maintaining an audit trail and supporting clients on any HMRC inquiries.  To learn more, visit www.IR35Pro.com

 

 

Accounts and Accountancy, Events, IR35 & Contracting, News

XpertHR helps organisations get to grips with pending IR35 reforms

Organisations are still wrestling with the complexities of IR35 ahead of 6 April 2021 when the reforms come into force for the private sector. The rules shift responsibility for determining an individual contractor’s employment status for tax purposes away from the contractor to the organisation engaging them.

Crucially, if an organisation finds that a contractor is caught by IR35, this will fundamentally alter the existing relationship between the parties from a tax perspective and the organisation will need to take action to remain compliant.

To help HR professionals understand and prepare for the changes, XpertHR is hosting a ‘What HR needs to know’ webinar on 26th February 2021.

Jeya Thiruchelvam, Managing Editor, Employment Law at XpertHR will present the session, with payroll consultant and lecturer, Kate Upcraft, explaining how the IR35 reforms will affect organisations and the practical steps HR professionals need to take to ensure that they remain compliant with the law and manage any additional liabilities.

A survey of 3,320 contractors in December by assessment tool IR35 Shield[i] found 52% of in-work contractors are yet to be assessed, with 23% saying their client had imposed a blanket ban on PSCs (personal services companies).

Many contractors also expressed uncertainty over the future of their engagement with a client with just 32% saying for certain that they will remain with their current client beyond April 2021, and just over half (51%) unsure of where they will be after April 2021. Employers could find they have resourcing gaps if they can’t access contractors so easily.

In the webinar, Kate will cover some of the key issues around IR35 including:

  • What are the IR35/off-payroll reforms?
  • What is changing on 6 April 2021?
  • What are the consequences of IR35 and the reforms for organisations that engage individual contractors in this way?
  • How can organisations prepare for the reforms?
  • Is there anything that organisations can do to protect themselves from additional liabilities?
  • How do you process invoices through the payroll for a contractor who is deemed to be caught by off-payroll working?

    Jeya Thiruchelvam added, “IR35 is causing considerable confusion – to start with the very separation of a person’s employment status for tax purposes from their employment status for the purposes of employment protection rights (such as the right to maternity leave and pay or the right to request flexible working) throws a lot of people.

    “Then the terminology of IR35 – contractor, engager, fee-payer, personal service company is also creating confusion. However, it’s crucial that organisations get to grips with all of this because non-compliance will expose them to additional tax liabilities.”

    XpertHR offers HR professionals a number of resources around IR35, including model letters around the determination and appeal process:
     

To register for the webinar on Friday 26th February 2021 at 11am and submit questions to the speaker, please click here.

For more information on XpertHR visit: www.xperthr.co.uk

IR35 & Contracting, News

72% of contractors remain committed to working for themselves despite COVID-19

New research from leading contracting accountancy firm, SJD Accountancy, has found that the vast majority of UK contractors and freelancers remain resilient and hopeful for the future, despite industry fears caused by COVID-19.

The survey, which took into account the views of more than 2,300 contractors in financial services, IT, and engineering, confirmed that 72 per cent of contractors plan to continue working independently for the next three years at least.

Included in this group were 27 per cent of contractors who see themselves contracting for the next 11 years at least, with 20 per cent feeling ‘very positive’ or ‘positive’ about their future prospects and 38 per cent feeling ‘neutral’.

Concerns linked to the COVID-19 pandemic were evident, with 66 per cent of contractors admitting to being worried about the impact of the virus on their work.

However, 43 per cent of respondents say the pandemic has not affected their work and 62 per cent would still recommend contracting to a friend. One respondent went on to explain their confidence in the market, saying: “Covid-19 and IR35 will have an impact on the market in the short term, but ultimately end-clients still need their projects delivered. Their businesses will not stop working, it’s just that the landscape will be different.”

Most contractors (65.9 per cent) have not applied for financial aid from the government since the introduction of various support measures and only 20 per cent of contractors have used the Coronavirus Job Retention Scheme (CJRS).

The second, third and fourth most common support options used were mortgage holidays (8.9%), VAT deferrals (8.5%) and the Business Bounce Back Loan (6.2%), all of which are delays on payment or loans that must be repaid, rather than support grants.

James Foster, Senior Commercial Manager at SJD Accountancy, said: “Our annual contractor survey has given us some valuable insights into the minds of contractors, and we’re pleased to see the general consensus is that people are still committed and passionate about their careers in contracting, despite the current difficult climate.

“Contractors have been among the hardest hit by the Coronavirus pandemic because bigger companies are receiving significant help from the government, with PAYE employees supported by the CJRS. With this, limited company contractors have been somewhat left behind in terms of financial aid.

“As employees of their companies, most contractors are eligible for the CJRS. However, only a salary can make up part of these CJRS claims and, unfortunately, most contractors draw the majority of their income as dividends and take only a small salary. Therefore, contractors were forced to weigh up if placing themselves on furlough and stopping work altogether was financially worthwhile. It would appear that, in many cases, contractors felt it was not.

“Nonetheless, and despite the uncertainty caused by the crisis, contractors are showing their resilience, with most determined to carry on working for themselves. This should be a welcomed attitude for all because the flexibility and talent within the contractor workforce will have a crucial role to play in the UK’s economic recovery in the months and years ahead.”

SJD Accountancy’s annual survey has been running for nine years and gains valuable insights from the firm’s varied database of contractors and freelancers on leading industry topics, including IR35, pensions and mortgages.

IR35 & Contracting, News

IR35 countdown is on: Leading legal, tax and insurance experts collaborate in event to support businesses

Specialist insurance broker, Kingsbridge, is bringing together leading legal, tax and insurance experts for an interactive event to provide employers, HR teams and recruiters with IR35 guidance as the private sector roll out date looms.

Led by Ann Swain – CEO of the Association of Professional Staffing Companies (APSCo) – the free to attend event will feature two panel discussions:

– Fresh Perspective: James Poyser, CEO, off-payroll.org, Andy Chamberlain, Director of Policy, IPSE, and Andy Robinson Business Development Director, Kingsbridge, will provide invaluable first-hand insights into how all areas of the supply chain should be approaching the 2021 changes.
– Tax & Legal: Andy Vessey, Head of Tax, Kingsbridge, Tania Bowers, Legal Counsel and Head of Public Policy, APSCo, and John Chaplin, Associate Partner, EY, will discuss the latest legislation and provide practical advice on how all parties in the contracting supply chain can best utilise the next six months to prepare for the reform.

The event will also provide those involved in hiring and managing contractors with one-to-one consultations with Kingsbridge’s expert consultants.

Andy Robinson, Business Development Director at Kingsbridge commented:

“While 2020 has been a difficult year, we’re at a stage where planning for the future is critical, and for anyone involved in the supply and management of contractors the most important topic of conversation at the moment is IR35. While the delayed extension was certainly beneficial in some aspects – with our recent research revealing that many employers had reversed blanket ban approaches – the global pandemic has certainly been a distraction for IR35 preparations. With just six months left, now really is the time to get to grips with your contractor determination processes. By bringing together leading industry experts on one platform we hope to equip as many employers and recruiters as possible with the information and guidance they need to ensure we all get IR35 right this time around.”

The event will take place on 12th November – Register for your place today https://lp.kingsbridge.co.uk/virtual-industry-insight_pr/

Business Advice, FInance, IR35 & Contracting

IR35 Review: It is only right that businesses are not held ransom for genuine mistakes that are made in the assessment process

The government has confirmed people will not have to pay penalties for IR35 errors in the first year of the tax changes. Victoria Roythorne, Head of Compliance at one of the UK’s largest independent recruitment companies, Outsource UK, reacts to the news of the ‘light touch’ approach.

“For such a complicated piece of legislation, the HMRC’s confirmation of a ‘light touch’ approach to IR35 is a welcome sight. Most businesses have been working tirelessly to prepare for the change and it is only right that they are not held ransom for genuine mistakes that are made in the assessment process. It is a positive and respectful decision for businesses and contractors alike, and reflects the HMRC’s understanding of the ongoing uncertainty, in part due to the delay in the spring Budget and the lack of detailed information.

“Businesses must not mistake this soft period as a get-out clause. HMRC has been clear that deliberate non-compliance will still be targeted under the ‘light touch’ approach and failure to prepare adequately could be self-sabotage.

“The silver lining of IR35 for many businesses has been the opportunity to take a broader view of their talent community. Being receptive to a flexible workforce made up of different engagement models could be game-changing for those who have previously understood their only viable new hire options to be PSC or perm. For many businesses, this marks a new era of contingent resourcing.”

Outsource UK has identified the most significant changes in the HMRC’s IR35 report, to help businesses understand what lies ahead – https://www.outsource-uk.co.uk/blog/ir35-feb2020#.XlkIkqj7Q2x

IR35 & Contracting, News

inniAccounts launches offpayroll.org.uk to help contractors find fairer clients and name and shame companies mismanaging IR35

inniAccounts, the online accountancy for contractors and independent consultants, has launched www.offpayroll.org.uk to help contractors that are struggling to get fair treatment over IR35, name and shame clients – inparticular those who won’t engage with contractors that use their own limited company.

Whilst blanket outside IR35 bans will be illegal in April 2020, many clients are legally circumventing scrutiny by simply making it company policy to not engage contractors who operate using their own limited company (PSCs).

Since launching the site on 6th January, numerous multi-nationals spanning construction to telecoms, finance to retail, through to government agencies have been named as treating contractors unfairly including Sky, Jaguar Land Rover, Ocado Technology, GE Aviation, Three, HSBC, Quilter.

Over 150,000 contractors have engaged with the social media campaign accompanying the site and it is proving to be a useful way for contractors to work together to understand the impact of off-payroll working and which companies to avoid.

The community-driven site has also identified the companies getting it right by providing very clear frameworks for engagement. These are the ones contractors should seek out for their next contract.

James Poyser, CEO of inniAccounts, says that the campaign is a warning shot to companies who aren’t playing by the rules:

“It’s always been a very mixed picture out there – some consultants are being forced into PAYE/umbrella, some have the IR35 all-clear, but the overwhelming trend is that the larger the end client, the more likely they are to have unfair policies, mostly due to a lack of resource, and exclude anyone operating a PSC.

“It’s not easy to find this out so offpayroll.org.uk is designed to help find the best and the worst. It’s also giving contractors a forum to stand united against unfair treatment and demonstrate to HMRC that the process for assessment, including the CEST tool, is simply not working and is putting livelihoods and economic progress at risk. It’s abundantly clear looking at the list of companies that lots have left it too late to assess IR35 properly. The comments being left on the site show that there are blanket bans on contractors who have a company, which in effect is removing their status as a business owner, and demoting them to temps.

“The good news is there’s now a public list of which companies are great to work with and those to avoid. My belief is that the companies that have been named and shamed will soon miss out on the best contracting talent out there, and that projects that rely on the pool of flexible talent will grind to a halt. That’s bad news as we head into Brexit where staying competitive and agile will be detrimental to success. Being IR35 friendly and fair will be a big differentiator in the coming year.”

inniAccounts will continue to lobby MP Sajid Javid for change, using information shared on offpayroll.org,uk, and has produced this guide for contractors to help them open up conversations with clients and prospective clients and instigate change: https://www.inniaccounts.co.uk/guides/off-payroll-ir35/

IR35 & Contracting

Service alternatives to keep businesses IR35-proof

With UK businesses still preparing for the upcoming introduction of IR35 and many brands deciding to ditch contractors, software testing company Edge Testing Solutions has identified service alternatives that businesses can use to ensure they remain IR35-proof.

The contractor market has for years provided a readily available source of expertise for the IT sector. It has provided niche technical skills, available for as long as the client requires and typically at short notice, thus supporting reactive as well as proactive resource demands. But if under IR35 the risk of using contractors outweighs these advantages, what are the alternatives available to organisations?

Consultancies and vendors are starting to provide a number of service alternatives to a traditional contractor solution which ensure that their customers are fully protected from IR35 risks. A few examples include:

1. A full Managed Service – the managed service approach suits those companies that require a strategic test partner which can be an ideal and low-risk vehicle for moving away from a large contractor-reliant model.

For the client, a Managed Service means they can outsource specific processes and functions with the objective of improving operations or reducing costs. The client and company are bound by the contractual service-level agreement which defines the performance and quality metrics of their relationship.

Another advantage of the Managed Service is knowledge retention. This is achieved through documentation to capture client system and business knowledge – a key advantage over the contractor model where any knowledge is lost upon completion of the contract.

2. Graduate and Apprentice-based schemes – another option for an organisation is to ‘grow their own’. This focuses on building up a permanent internal test pool to replace the contractor model using graduates or apprentice-based schemes.

However, this approach comes with its own challenges with the added effort required to identify, employ, mentor and train ‘new blood’. There is where providers are training employees on the client’s site with support, mentoring and pastoral care. After an agreed period, typically twelve months, the client can then offer full time employment to the candidates, with no additional recruitment fees. We’ve already implemented this service with clients such as Deloitte, Gatwick Airport and Nimbus Cloud taking it up.

3. Replicating the contractor model – a key advantage of the contractor model has always been the ability to rapidly take on and then remove additional test effort at very short notice. Although this might seem a challenge to replace using some form of permanent workforce, there are excellent effective and efficient solutions available at a much lower comparable cost than the contractor model.

An example is a Digital Test Hub which provides continuous on-demand low-cost testing service utilising teams based across the UK. Rates, which start at £210 per day are highly competitive against average contractor rates and are fully IR35-compliant. Service take-up can be achieved quickly and with the added flexibility of ramping the service up and down as demand requires.

In addition, there is no minimum or maximum team size – the client service dictates what is required, when it is required and the size of the team.

Richard Mort, a director at Edge Testing Solutions, comments: “We are seeing a slow but steady awareness dawning on our client base that IR35 could severely impact and possibly impede enterprise growth through the introduction of yet another business risk. The contractor market has for years provided a readily available source of expertise for the IT sector. It has provided the niche technical skills, available for as long as the client requires and typically at short notice thus supporting reactive as well as proactive resource demands. However, IR35 mitigates these advantages and for some organisations makes using contractors an unpalatable approach.

There’s going to be the biggest game of musical chairs in the contracting industry as every contractor tries to grab a seat with ‘outside IR35’ written on it. From April next year their options will be limited. There have already been reports of large-scale users of contractors, such as banks, saying they will not engage off-payroll workers from next April but that may turn out to be a knee-jerk reaction similar to what was seen in the public sector when the rules were first introduced.

We could well see a more dramatic fall in the number of IT contractors this quarter and year. In those cases where the IR35 status of contractors is borderline, private sector organisations likely will err on the side of caution and refuse to engage those contractors off-payroll. Despite some of the claims being made, however, it seems unlikely that the rules will be the death knell of contracting. Much will depend on whether HMRC takes tough enforcement action and publicly hauls an organisation over the coals. If that happens, it likely will have a chilling effect on the use of contractors. If enforcement action is not forthcoming, the impact of the reforms could be more limited.

The IR35 challenge need not mean the end of a flexible external test workforce though. There are solutions available to fit each organisation’s ongoing tactical and strategic resourcing needs. IR35 may, in many ways, streamline and add greater efficiency to future resourcing models.”