Some businesses have reacted to plans to extend IR35 legislation to the private sector with blanket bans on contractors, but they may face problems later if they need a more flexible workforce, says Lucie Mitchell.
Changes to IR35 legislation are due to come into force in April 2020, which will see medium and large private sector organisations take responsibility for assessing and determining a worker’s employment status.
This means that those organisations employing contractors through limited companies will have to decide whether these workers are operating inside or outside of IR35. If a contractor is considered to be inside IR35, HMRC will deem this to be a ‘disguised employee’, and therefore subject to the same tax and NI deductions as the permanent workforce.
“[Organisations] will now have to consider each contractor who they contract through a personal service company, and to use reasonable care in deciding if they should make PAYE deductions,” explains Beverley Sunderland, managing director of Crossland Employment Solicitors.
The new IR35 rules have been criticised by experts as being overly complicated, burdening employers with added administration and costs and restricting the flexible labour market. “Firms who have to wrestle with the difficult decision as to whether IR35 applies or not will be reluctant to hire a contractor and place them outside of IR35, because they will fear reprisals from HMRC,” remarks Andy Chamberlain, deputy director of policy at the Association of Independent Professionals and the Self-Employed (IPSE).
He adds that there is quite a bit of panic out there right now, from organisations that don’t understand the new legislation, have yet to prepare for it or still have no idea about it. In fact, according to a recent report by Hays, a third of private sector organisations who engage non-permanent contractors are unaware of the IR35 reforms. Of those that are aware and regularly engage non-permanent contractors, less than half have begun preparing for the changes.
Businesses must therefore look at their supply chains to determine the risk, advises Barry Stanton, partner at law firm Boyes Turner. “There will be many who fall outside IR35, some who are border line, and others that fall inside. End users now have the opportunity to consider how they propose to respond to those that are border line and those they consider to be inside IR35.”
In response to the reforms, some large financial organisations, including HSBC, Morgan Stanley, Lloyds and Barclays, have decided to go for a risk-averse, blanket ban approach, by either culling their contractors completely or forcing them onto PAYE and into umbrella companies.
Andy Vessey ATT, head of tax at Larsen Howie, believes this approach is short-sighted and lazy. “It will only serve to drive talent into the arms of competitors who are, at least, willing to engage self- employed contractors even if via an outsourced supplier. I can understand large businesses wanting to mitigate their tax risk, but why it has never occurred to these banks to go down the outsourced supplier route leaves one scratching their head.”
Julia Kermode, chief executive of The Freelancer and Contractor Services Association, adds: “Many of those firms rely heavily on project-based contractors to keep their businesses functioning and many contractors will turn their backs on those firms as they shun permanent employment. If firms no longer have the contractor population to turn to on tap, they may need to increase the rates on offer to entice them back.”
Recent research by Robert Half revealed that 62% of medium and large private sector businesses are worried about missing out on skilled contractors when the changes are introduced, while 42% are concerned they will lose their current freelancers if they can’t renegotiate contracts in time. “If they don’t want to lose flexible talent, now is the time for businesses to adopt a different approach and engage positively with that flexible workforce to establish a contractor’s IR35 determination,” comments Kermode. “Businesses that adopt a more considered approach to properly assess their workforce are more likely to be in a win-win situation, as they can hold on to their contractors and potentially put themselves ahead of their competitors, who might be making rash decisions when it comes to the new reforms.”
She therefore advises employers to avoid knee-jerk reactions, such as issuing a blanket ban, as the business will suffer. Instead, put a plan in place right now, and establish clear lines of communication to ensure everyone involved understands IR35 and its implications.
“Businesses need to identify their current contingent workforce and how they are engaged,” she says. “They will also need to decide who has ultimate responsibility for making decisions on the IR35 status of their off-payroll workers, whether that is someone senior from HR, finance or procurement. They will then need to develop and implement a robust process to ascertain how each engagement will be assessed, and then review their processes and supply chain to ensure it is fit for purpose.”
Chamberlain advises putting contracts in place, and ensuring that the working practices match what is laid out in the contract. “Organisations must make sure they have good contracts that reflect the true nature of these engagements, which is bringing in specialists to do some work for them, who will be paid on completion of that work. That is the relationship – it is nothing like employment – the client won’t treat them like employees, they won’t behave like employees, and therefore IR35 doesn’t apply and they can continue to engage with them. That is the pragmatic way that hiring organisations should be going with this.”