The Off-Payroll Soap Opera
Dave Chaplin, founder and CEO of ContractorCalculator on IR35.
Many avid soap opera fans have their favourite cliff hanger moments that come at the end of their favourite programme, but we recognise that it’s entertainment and different from everyday conflict and drama. However, when it comes to the off-payroll tax, it’s the type of drama playing out in the real world for freelancers impacted by HMRC’s Off-Payroll legislation which is pitting contractors, clients and agencies against each other as they battle to understand and apply the cruel and unfair rules.
The situation is damaging previously amicable relationships between businesses, agencies and the self-employed. HMRC has introduced draconian and burdensome legislation to shore up the Treasury’s coffers which is strangling the supply chain dynamic and the UK’s flexible economy. By shifting the compliance responsibilities to end-hirers and agencies along with a degree of risk, HMRC has prompted some in the supply chain to act in their own best interests and potentially break the law.
Clients have found themselves reluctantly caught at the front of the firing line, now responsible for assessing a contractor’s IR35 status and facing the threat of significant tax and penalties if HMRC successfully challenges an ‘outside IR35’ assessment – although do bear in mind its poor track record in the courts. This has all meant that some clients have penalised contractors and themselves by issuing blanket bans and refusing to engage any contractor when a clear contract for services which is outside IR35 exists. In the public sector, we have seen clients penalise contractors further by unlawfully deducting their own new employer’s National Insurance (NI) obligations from the contract fee to offload their own new tax bills. Conversely, renegotiations have been used by contractors in high demand to push their part of the new tax bills onto their clients.
Exploiting contractors by compounding tax hikes with unlawful deductions has been common practice in the public sector. When will HMRC acknowledge that many contingent workers in these exploitative arrangements are fairly low paid workers with no better options, not the high-earning, tax-savvy individuals who HMRC thinks they are?
Stuck in the middle….
Stuck in the middle are the recruiters who exist to keep all parties happy, but whose main priority is their client for whom they want to attract high quality contractors, negate tax and employment rights risk and keep costs down. However, under off-payroll, a client cannot attract the best contractors without exposing themselves to tax risks or incurring greater costs. Most contractors will not blindly accept a contract ‘inside IR35’ without increasing their rate.
The fallout in the public sector has seen some agencies helping clients to achieve their goals by hook or by crook. Some have been dishonest about the contract’s IR35 status whilst others advertise misleading and inflated rates with the clients own employment taxes bundled in, which are later told must be paid by deducting it from the contractors rate – which was the law under the historic IR35 rules, but isn’t the case under the new rules. This is where much of the confusion sits. Unscrupulous clients will find agencies who can ‘help’ them source contingent workers who will undoubtedly be at the lower end of the pay scale with little bargaining power. Under off-payroll, those who can least afford it will be the most affected.
All is not lost
All parties deserve to be treated fairly, and we are now heading into an era where without full transparency, there are considerable risks. We are already seeing contractors being offered contracts but refusing to agree end dates past February 28th 2020 unless the agency can offer them some firm evidenced comfort on their IR35 status. This cannot be a verbal promise, it needs to be documented and written into the contract.
The reforms are riddled with flaws, but those agencies who deal with top end contractors will become uncompetitive unless they can steer through the chaos – they and their clients will lose out unless they have a magic money tree and can afford to put everyone on fixed term contracts at higher fees. Open communication is key if recruiters want to continue to attract top talent and maintain a healthy supply chain. And the conversations need to be happening right now. Clients need educating and agencies need to step up to help and be able to provide an independent assessment service for peace of mind. But the message is clear – if clients want access to talent, they will have to accept the tax risk or extra costs that comes with off-payroll.
Cue the cliff-hanger music, but unfortunately this is no soap opera, it’s real life with real consequences.