IR35: The Saga Continues….

Dave Chaplin, CEO and founder of ContractorCalculator.

In the last couple of weeks we have seen a rush of companies, notably in the financial services sector, set out plans to phase out their use of self-employed workers who operate via limited companies in the light of the looming new Off-Payroll tax legislation that is due to hit the private sector in April 2020.  

The reforms have certainly prompted firms to reconsider how they engage with their workforce and some have discovered instances where they had long-term contractors working with them who have been happy to convert to full-time employment.  

However, the banks are a very special case because they cannot reclaim much of the VAT that is charged to them by contractors. So, by putting them on payroll, they can potentially save the VAT, and can use that to pay the extra employment taxes that are due under the new reforms – which is actually less than the VAT. For those firms that are unable to offset VAT, this strategy isn’t available to them.

For the changes in banking, the overall effect on the Treasury is likely to be a reduction in tax take, particularly because banks are offering reduced rates in conjunction with the changes – but policymakers are blind to this. The effect on the hiring firms will see them struggling to hire the top talent and skills they need for projects and in instances where they need highly sought after skills they will undoubtedly discover that hiring contractors on payroll will cost them significantly more as rate rises for in-demand contractors are inevitable as the flexible workforce shrinks as part of its rebalancing.   

Decisions made by the likes of Barclays and Lloyds could be seen to be a knee-jerk response to legislation that they simply do not know how to navigate and we have seen other firms take blanket ban decisions to not engage contractors – whilst this could be considered an overly cautious approach, for them it’s more of a strategic one and makes sense.

Caught in the middle of all this are the recruiters. Agencies have the unenviable position of being the fee-payer under the Off-Payroll tax, unless the client is caught failing to fulfil their obligations, which means they hold the tax risk for any incorrect ‘outside IR35’ status assessments. This new compliance role will bring some extra financial costs for agencies, although most of it can be outsourced. However, agencies should remember that this administrative burden is required for all contractors deemed within scope of the rules.

Though it is written into statute, and not expected to change under the new rules, the requirement is that agencies, as the fee-payer, pay employment costs at a combined rate of 14.3% of the contract rate – which without a renegotiation of rates with both the contractor and client is not a realistic proposition. No-one has a magic money tree and agencies cannot afford to cover these costs. These whole-market renegotiations are likely to lead to disputes and disruption for all parties.

But firms should not panic, provided they begin their compliance process now.  Getting accurate assessments done, which can be outsourced to specialists is essential. And provided firms stick within the rules and do the right thing, there is very little risk.  With its limited resources, HMRC will target the low hanging fruit. Firms that have done nothing to prepare for the new legislation or tried to find ways around it will be the first set of targets.

Other than making sure they can quickly assess contractors, the rest of admin and process. Firms do not need to embark on expensive workshops to learn how to hire contractors properly.  Tips for engagement can be written on one side of A4 – it is that simple.  The key is to avoid the “Have I got a good idea for you” brigade and stay within the law.  There is likely to be a proliferation of schemes popping up purporting to “help” firms deal with the new reforms.  

Planning for the new off-payroll reforms is key and recruiters and end-hirers would be advised to:

Oct 2019: Start assessing and profiling the workforce likely to be affected by the new rules, analyse the data and identify key risks.

Nov/Dec 2019: Start speaking to contractors – understand their thinking and refine a plan.

Jan 2020: Start implementing the plan.

Feb 2020: Finish implementation in preparation for April 2020.

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