Three quarters of contractors are planning to leave their positions due to the proposed changes to the IR35 legislation, according to a survey by offpayroll.org. The lobby group cited mistrust of HMRC, having enough cash reserves to see them through whilst not working and confidence that they are in fact legally self-employed and will have no issues getting work in the future.
In a week when yet more protests have taken place against the proposed IR35 reforms – more than 500 protestors gathered outside parliament on Wednesday – we look at what the changes really mean, and whether contractors do actually need to quit their jobs.
What does the reform mean?
From April 6th, the responsibility for declaring the tax status of a hired employee – one deemed inside IR35 - switches to the organisation rather than the individual. Currently, this lies with the contractor. The aim of the reform is to remove the tax advantages of providing services via a limited company for individuals who are not truly working for themselves. In other words, those employees whose working practices are more akin to those of traditional employees. This is why you will have seen some of the larger banks such as HSBC enforcing policies to prevent the use of limited company contractors.
The market response
Different businesses have approached the reform in different ways. Some businesses, as previously mentioned, are simply stopping using limited company contractors. Others have decided the best route forward is to deem all contracts within IR35 to remove the risk entirely. This is contrary to the case-by-case nature of the policy (and short-sighted in my opinion).
On the other hand, some companies have educated themselves on the reform and will make a number of small changes to the way they operate and produce their contracts to ensure contractors remain outside of IR35. This, we believe is the way forward. Our aim is to ensure that all contracts are IR35 compliant and we use Qdos Contractor, a specialised tax consultancy business with over 30 years’ experience, to do this. To give some context, their assessment tool was used in the private sector for TFL and The Home Office. They were then audited by HMRC (the worst-case scenario!) and not a single assessment was challenged by HMRC. This is a tool that works!
The impact moving forward - the rise of the Service Provider and the umbrella
A number of banks and financial services companies rely heavily on the services of limited company contractors for project and BAU work. Due to the ad-hoc nature of this work, they cannot simply replace the contractors with a permanent employee. This means that they’ll need to use a service provider to bridge the gap. As a result of this, we will likely see a higher number of individuals contracted by service providers who are willing to shoulder the risk, rather than end-clients. My issue with this is that if the end-client is willing to pay for both the day rate as well as the service providers’ fees, could they not pay this sum to the contractor in order to mitigate the effect of IR35 on their rate? On the flip side of this however, some of the larger banks are now outsourcing their IT abroad meaning the money is leaving the UK economy completely, leaving neither HMRC or the contractors effected better off.
The other option is to go through an umbrella company. This means when the reform comes into force there will be no need to review your contract and you can continue to operate as you did before the reform, as the umbrella company has you covered. Many companies are also significantly increasing rates to cover the higher tax deductions. The downside, however, is that, more often than not, you can end up taking home substantially less than you would have done through a limited company before the reforms were introduced. Especially now that a number of contractors are being forced to pay the apprenticeship levy and the company’s national insurance as well as umbrella fees.
A move to the dark side?
Some of the contractors I’ve spoken to recently are deliberating a move over to permanent employment. A number of people no longer see the value in contracting if they are put into a higher tax bracket. Many people seem to forget that the reason contractors do earn more than permanent employees is due to their convenience and the risk that they’re willing to shoulder. Contractors receive none of the benefits of permanent employment such as holidays or bonuses and often work outside of normal hours, not to mention their lack of job security. If their take-home pay doesn’t accurately reflect this risk, then it’s no longer worthwhile for them. As a result of this, we could see an increase in contractors seeking permanent roles.
There are also contractors I’ve spoken to with fewer roots in the UK who are now taking their skill set elsewhere in Europe.
It’s not all bad…
There could be some positive outcomes for contractors. Firstly, if contractors become less readily available, it could result in companies being willing to pay above market rate for their services. Secondly, in order to make contracts IR35 compliant, companies can make some small changes to ensure it is clear they are employing the person’s services rather than the individual themselves. One of these changes is to offer remote working. This means we could see an increase in the number of contracts offering remote working, which is actually already a common request amongst contractors.
It’s all speculation
The exact impact of the changes remain to be seen. With less than two months to go until the April 6th implementation date, protests are still ongoing and many groups are continuing to lobby the government.
There are a few things to consider though, firstly the CEST tool for determining IR35 compliance is unfit for purpose and should bear little weight in whatever decision you make. Secondly, every instance should be considered on a case-by-case as HRMC has stated that blanket statements do not constitute as reasonable care. It is also worth noting that so far, HMRC has a notoriously low win rate on all IR35 cases which have been taken to court. It is also very unlikely that small to mid-sized companies will actually be audited by HRMC and companies of less than 50 employees are not subject to this legislation.
At this stage, jumping ship seems like a hasty reaction. As does not considering inside IR35 roles (especially if the rate is increased to compensate tax deductions). Whilst we do try to convince all our clients to access fairly and keep roles outside IR35 where possible, it’s not always the case. As the heading suggests, at this moment in time its all speculation and it requires clients, recruiters and Candidates working in unison to find the best possible solutions.
For anyone concerned about their own position or looking to move into a suitable contract role, do give us a shout at firstname.lastname@example.org.
by Claire Shoesmith
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