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Impact of IR35 on contractors

Are most going to end up payrolled?

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I’ve seen endless items which rehearse the pass the parcel of who holds the PAYE obligation under the new IR35 rules, but very little that talks of the impact on contractors themselves.

 

As I understand it, if I work through my own limited company, I’m caught and my earnings have to be payrolled by the client.  This applies whether my company is paid directly by the client, or whether there is a recruiter in the middle.  Have I understood correctly?

 

Given that the client has to make the determination of whether a worker is inside IR35 (and is the one on the hook if they get it wrong), most contractors will have little room for manoeuvre.  As has been reported for the public sector, more or less everyone will be paid less PAYE/NI.

 

Or has anyone any different experience?

Replies (38)

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By Matrix
30th Aug 2019 10:13

I agree, they were quite happy for the contractor to bear the risk but wouldn’t want to do so themselves.

Some of my contractors are going permanent, some are not interested or haven’t got back to me but I am assuming they will no longer contract so the work will have to be replaced.

A prospect is on short term consultancy contracts which look outside IR35 but I warned that the client could just blanket PAYE such contracts. He may target smaller businesses as a result.

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By Duggimon
30th Aug 2019 10:42

The rules on who is caught by IR35 have not changed. Contractors who weren't dodging their tax responsibilities in the first place should be able to argue their engagements do not fall under IR35 and so will be unaffected.

The big issue and sticking point will be the large private sector entities not applying the rules correctly. I'm hoping they will be better at it than the NHS trusts and the like were, and that HMRC actually provide the better tools they've promised, but I'll be surprised if I'm not digging out the same letters I wrote last time around explaining why a limited company engaged for a one off market research project isn't an employee.

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Replying to Duggimon:
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By Payrollgal
30th Aug 2019 10:52

Duggimon - Why would you assume that only dishonest contractors will be the ones caught by IR35? It has nothing to do with 'dogding tax responsibilities' and everything to do with employment status, no?

I know a lot of personal company contractors that fully abide by the tax laws but will undoubtedly be caught by IR35 next year.

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Replying to Payrollgal:
By Duggimon
30th Aug 2019 11:07

If they're in IR35 next year they're in it now and should be paying more tax than they are.

The rules determining who is or isn't within IR35 are not changing, the change is to who is held responsible if those rules aren't correctly applied.

Just now it sounds like the contractors to whom you refer are within IR35 but as the determination is theirs to make, have decided to ignore the rules and pay tax as if they were not. Once the determination is not theirs to make they won't have the option.

If they are legitimately not within IR35, the hope is they can convince their customers of that and not be brought into it unnecessarily.

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Replying to Duggimon:
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By Matrix
30th Aug 2019 11:09

The contractor can argue all they want but if the engager assesses them as inside IR35 then they take home less pay or look elsewhere. These rules completely change consultancy services. Not all contractors work for years at the same place bearing no risk.

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Replying to Matrix:
By Duggimon
30th Aug 2019 11:27

I agree but that's nothing to do with what I said.

People who are not currently in IR35 will remain not in IR35, people who are in it will remain in it. The change to the rules does nothing to alter this, only makes an incorrect assessment more likely.

Hopefully private sector engagers will be better placed than the public sector ones were to avoid this happening.

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Replying to Duggimon:
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By Matrix
30th Aug 2019 12:08

But if those private sector engagers come to a different view then the contract could come into IR35. Maybe the contractors in the private sector will be more bullish and the engagers more resources but the problem is we don’t know.

I agree that the rules and facts haven’t changed so the result should be the same. HSBC is making many contractors permanent which suggests they may have always fallen inside.

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Replying to Matrix:
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By Payrollgal
30th Aug 2019 12:12

I think a lot of engagers wont want to run the risk of getting it wrong so will just make them deemed employees regardless of their status.

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Replying to Payrollgal:
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By Matrix
30th Aug 2019 12:31

Yes that is it. They won’t want to bear the risk now it is theirs and therefore the result could be different, even though as Duggimon says, it should not be.

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Replying to Payrollgal:
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By Matrix
30th Aug 2019 16:20

Duplicate

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Replying to Payrollgal:
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By paul.benny
30th Aug 2019 12:32

I think that's key. "Employers" have so much more at stake than individual contractors (and deeper pockets) and so are more at risk from HMRC action if they get it "wrong".

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Replying to Duggimon:
RedFive
By RedFive
30th Aug 2019 12:17

I agree with what you are saying but I don't think the large Corporates will take the risk - as we have seen in the public sector.

Many contractors who are legitimately outside IR35 will be told to go on payroll, umbrella or leave and won't be given the choice to carry on as they are.

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Replying to RedFive:
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By paul.benny
30th Aug 2019 12:29

So are you saying that a contractor working through an umbrella company can stay outside IR35? Won't clients just treat all contractors the same?

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Replying to RedFive:
RedFive
By RedFive
09th Oct 2019 12:43

RedFive wrote:

I agree with what you are saying but I don't think the large Corporates will take the risk - as we have seen in the public sector.

Many contractors who are legitimately outside IR35 will be told to go on payroll, umbrella or leave and won't be given the choice to carry on as they are.

Looks like I (and Matrix, and a few others) were right.....(not that we want to be)

https://www.accountingweb.co.uk/tax/hmrc-policy/ir35-banks-move-to-clamp...

https://www.contractoruk.com/news/0014278domino_effect_ir35_reform_bites...

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Replying to Duggimon:
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By Payroll Pete
02nd Sep 2019 16:18

Clients are not taking the risk. I know of four large banks who have determined that all future contracts will be deemed inside IR35 regardless of the actual working agreements - no exceptions.

So people who were outside IR35 are now being force to pay it or look elsewhere

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By ireallyshouldknowthisbut
30th Aug 2019 11:27

I think we will see a broad spectrum of:

1. Not doing anything due to not understanding it.
2. Companies actively taking a punt on yet another rule they don't comply with.
3. Companies looking to get a bit of paper saying all their contractors are fine and then potentially insuring the risk.
4. Companies making contractors use HMRC's tool for inside/outside., ie taking on only a narrow range
5. Those looking to intermediaries who are already arranging themselves around utilising the "small business" rules to set up alternative arrangements to effectively carry on as now.
6. Business looking to payroll everyone via intermediaries as a blanket system.
7. Companies no longer taking on any contractors at all.

Unlike the public sector, a whole range of responses will arise.

I note even in the public sector, that is opening back up, and I have a couple of contractors now in public sector roles which apparently outside of IR35, when very similar ones 2 years ago were apparently not!

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Replying to ireallyshouldknowthisbut:
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By Maslins
30th Aug 2019 12:56

Agree with a lot of this. As a firm with lots of Ltd Co contractors, we're hoping for predominantly 3 (or perhaps 1-2 as that won't impact our clients!). 4 might work, but most would agree CEST is skewed towards "inside" results. 5 seems dodgy. Unsure how popular 6 will be, I think the risk averse corporates would far prefer 7.

As you say, outside public sector roles are increasingly cropping up. Some say that's purely due to them losing good contractors to the private sector, hence Apr 2020 will basically eradicate these. Others suggest there's an initial over-reaction, then gradual drift back.

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Replying to Maslins:
By ireallyshouldknowthisbut
30th Aug 2019 14:21

Re 5, what I have seen is some of the large intermediaries who currently supply (say) 10 IT people to a large business, instead setting up a new entity, have the contractors contract into it, and then the new entity billing enmasse to the end client. So the end client is just paying for outsourced IT services as far as anyone is concerned at HMRC. The new company becomes "Generic IT services Ltd" and the contractors are in the same boat as now, taking the IR35 risk. "Generic Ltd" is essentially a shell co but try to look like a supplier of IT services, not just labour.

This is what I have seen in the public sector to get round it, but works when the rules change due to the small size of them. I don't know legally how well it would stand up, but it would be hard to distinguish between this and 'genuine' outsourcing.

Around 25% of my business is small contractors & consultants etc, I am expecting some fall out, but not the whole lot to go. I think a lot of the time the end client will just want a certificate drawn up saying they are probably outside, but like all these things they will be a big fuss for about 2 months, and then it will be ignored 12 months later like GDPR and all the rest of it.

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Replying to ireallyshouldknowthisbut:
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By Tax Dragon
02nd Sep 2019 11:57

ireallyshouldknowthisbut wrote:

So the end client is just paying for outsourced IT services as far as anyone is concerned at HMRC.

Not "anyone" - assuming that someone at HMRC looks at the ITEPA 2003 s716B/SI 2003/2682 Regs 84E–84H returns.

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Hallerud at Easter
By DJKL
30th Aug 2019 14:37

Just to mention ,with the likes of the NHS even what one might not consider falling within IR35 can and does in their interpretation.

My brother in law is a Qualified Person in the pharma industy, he signs out batches of drugs from factories but also audits processes within these.

One could think of him as a pharma auditor with circa 30 distinct clients around the world who he acts for, some year after year, others one off projects, and never usually at a client for more than 4-5 days max in a row, usually 1-2 days max and then could be weeks/months before next batch release etc that requires his attendance- he has to work at their premises as he needs access to all their purchase/ manufacturing records, he audits the paper trail.

He has one NHS unit where he signs off on their use of a radioactive isotope arguing that the one day he worked on their audit falls within IR35, tax deduction by them has ensued, it does not matter one bit what one says to them, this is their treatment. (paranoia has set in)

A different NHS unit recognises what he does is not within IR35 and treats him accordingly. (As they ought, the business risk if he makes a mistake re his company's liability and the PI cover he must carry certainly indicate his economic risk)

So as IR35 creeps out into the private sector how long until accountants and auditors doing work for their clients fall under its spell as the client paying them develops paranoia?

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Replying to DJKL:
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By Payrollgal
30th Aug 2019 14:44

Blimey, good point.

I will be paying the tax and NI for my window cleaner before long!

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Replying to DJKL:
By Duggimon
30th Aug 2019 15:17

My example from my first response was one I actually dealt with, a company with four employees who carry out market research were engaged by an NHS trust to perform some research for them as a one off engagement.

Couldn't be clearer it was outside IR35, they were working on a one off project, under their own supervision and expertise, the trust did not engage any particular person/people, the duration was maybe six weeks or so, the NHS trust had no input into how the work was done, they were just provided with the results.

Then, when the invoice went in, they asked for an NI number so they could put it through the payroll.

We eventually got them to accept it was outside IR35 but we had to refuse to hand over the NI number and left it outstanding for several months before they caved and paid the gross amount over, as was correct.

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Replying to Duggimon:
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By Matrix
30th Aug 2019 15:51

So you concur that they are the same rules with potentially different outcomes afterall.

Ross Martin seem to think that HMRC’s work is done for them if contracts become inside IR35 and they could challenge prior years whereas I thought HMRC weren’t going to go back.

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Replying to Matrix:
By Duggimon
30th Aug 2019 16:52

Whether a contract falls within the IR35 legislation is a point of fact and does not change with the new rules.

The issue is with engagers applying the legislation incorrectly, not with any change to the legislation.

If an engager has a kneejerk response and assesses everyone as within IR35 so as to avoid any potential issues, it doesn't mean those contracts have been put inside IR35 by the new rules, it means the engager has applied them incorrectly and is unfairly taxing people.

The change in regulations does not put anyone inside IR35 who was not already in there to begin with. It will only affect people who were previously dodging tax they ought to have been paying, or people who work for engagers incapable of properly applying the rules.

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Replying to Duggimon:
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By AndyC555
02nd Sep 2019 14:55

"Whether a contract falls within the IR35 legislation is a point of fact"

Quite so. But as we have seen in the courts, HMRC can look at the facts and come to a different conclusion to the individual concerned, and off to the courts we go.

You write as if all contracts come with a 'yes' or 'no' stamp on them, with no possibility of the wrong stamp having been applied and making it easy and obvious which ones are within IR35 and which not.

If that were the case HMRC would never have lost a single IR35 case as they would only take those involving 'yes' stamps where the individual had ignored the stamp.

That's clearly not the case.

The point is that for those cases where there's a grey area, the individual would have been prepared to take the risk of enquiry. A large business, with dozens or hundreds of potential cases has two choices. Spend hours reviewing each case (and take the risk of doing this and still coming to a conclusion HMRC subsequently disagree with) or just blanket call them as falling within IR35.

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Replying to Matrix:
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By Ian Lawrence
23rd Sep 2019 17:17

Yes I thought they weren't going back aswell. I cannot find where I read this. Do you know where I can find out where this was said?

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By GR
30th Aug 2019 20:08

I wouldn't say most are going to be payroll'ed. I would say around 30% payroll'ed (plus or minus 10%).

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By C Graham
02nd Sep 2019 10:36

Those contractors whose services are forced through payroll should demand paid holiday, paid sick pay, maternity pay etc - pro rata of the hours they work. Treat them as payroll employees and the company must therefore be the employer.

https://www.eoc.org.uk/employees-rights/

' If you are a freelancer, self-employed or you work for an agency, you are a worker and not an employee and as such you would not be entitled to the same rights as an employee. '

Can you be inside IR35 and be a worker? Surely you are one or the other.

IR35 = traffic warden legislation.

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By silverghost
02nd Sep 2019 11:14

What HMRC refuses to understand is why companies engage contractors. Many of them want the flexibility of being able to lay them off and do not want the ties that go with employees.

Think about it - where would HMRC obtain the evidence that a contractor might be an employee? From the end client. They are hardly going to incriminate themselves, are they?

I can see most engaging companies being bullish about this. HMRC will collect some money from the cautious ones, but they will not be the higher-paid contractors.

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By dmmarler
02nd Sep 2019 12:04

HMRC also refuses to understand why people want to work through limited companies - to limit their liability! It wants to believe everyone is out to cheat them. If our new Chancellor simplifies the tax structure to eliminate Employers NI (being a tax on employment) and to incorporate NI into general taxation, the need for IR35 would disappear immediately. Much more satisfactory all around,

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Replying to dmmarler:
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By dgilmour51
02nd Sep 2019 13:00

dmmarler wrote:

If our new Chancellor simplifies the tax structure to eliminate Employers NI (being a tax on employment) and to incorporate NI into general taxation ...

Ho-ho-ho Haa-Haa-Haa
I'll need a truss to stop my sides splitting.
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By Peter Bromiley
02nd Sep 2019 13:51

What will be the case after April 2020 is that contracts will have to be offered on an 'outside IR35 basis' or on an 'inside IR35 basis'. And if Clients and Agencies want to attract the best contractors, they're going to be working out ways to get the CEST tool to give the desired result (e.g. making the contractor decide on his/her scheduled hours - which might happen to be 9 to 5) BEFORE they know who the contractor is.

They might also want to bear in mind the fact that there are very few HMRC IR35 inspectors; and that if contractors can insure themselves against IR35 taxes via companies like Qdos - then so - sooner or later - will end-clients. And paying a few hundred pounds in insurance may be very good value if it saves having to pay thousands of pounds a year more to attract an 'inside IR35' contractor than they were previously paying to attract a contractor under the existing legislation.

It's going to take a while to play out.

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By tonyaustin
02nd Sep 2019 14:15

The new rules are essentially no different to the PAYE regulations which apply where a client contracts with an individual. That's why pre IR35 contractors started using companies - the PAYE regs could not be applied by the client and the contractors could remunerate themselves with dividends - currently taxed at a lower rate.

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Replying to tonyaustin:
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By paul.benny
02nd Sep 2019 15:13

The other driver is that recruiters force contractors down the limited company route. It offloads all of the costs and obligations of employment (not just employer's NI, but holiday pay, pension) onto the worker and allows for a more attractive headline rate.

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By Roland195
02nd Sep 2019 14:47

There is no chance at all that the big companies charged with assessing the nature of the contracts are going to accept any risk or expend resources of time & professional advice in reviewing the arrangements of all their contractors therefore > all are subject to Tax/NI deductions, rightly or wrongly.

I would agree that if this is the assessment made by the end user, then it does seem to suggest this would therefore be a tough argument from the contractors that they haven't been subject to IR35 all along.

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Replying to Roland195:
By JCresswellTax
02nd Sep 2019 17:11

Sorry but you are wrong. All it will take is for one big company to operate the rules correctly and the rest will follow suit - or lose the best workers.

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RedFive
By RedFive
09th Oct 2019 12:43

RedFive wrote:

I agree with what you are saying but I don't think the large Corporates will take the risk - as we have seen in the public sector.

Many contractors who are legitimately outside IR35 will be told to go on payroll, umbrella or leave and won't be given the choice to carry on as they are.

Looks like I (and Matrix, and a few others) were right.....(not that we want to be)

https://www.accountingweb.co.uk/tax/hmrc-policy/ir35-banks-move-to-clamp...

https://www.contractoruk.com/news/0014278domino_effect_ir35_reform_bites...

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