IR35: Accountants could lose out

Losing revenue
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Dave Chaplin
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Dave Chaplin has an action plan for accountants who risk losing revenue if they fail to keep their clients outside of the IR35 rules.

Public sector experience

6 April 2017 was a poignant date in the public sector calendar. The IR35 reforms came into effect shifting the IR35 compliance burden from public sector contractors onto end-hirers and agencies. The fallout has not been pretty and has left the contractor supply chain reeling as agencies, public sector bodies (PSBs), and even accountants risk losing contractor clients and revenue as a result of the new legislation. 

With industry experts speculating with conviction that the IR35 rules will be rolled out into the private sector in the near future, any problems faced by accountants who act for contractors will now intensify.

Those accountants who are unable to present a compliance solution to keep contractor clients outside IR35 could suffer disastrous consequences. More contractors will be either caught by IR35, or be forced inside IR35 as blanket bans are imposed by hirers.

Those contractors who will be within IR35 will no longer have a need for an accountant as they move to PAYE-based solutions. The net result will see accountants losing clients and therefore losing annual revenues, which could run into tens of thousands of pounds.

Testing conducted by Contractorcalculator has found that on average 30% of contractors fail the IR35 tests and have little hope of passing. Those 30% of contractors who are currently ignoring the IR35 rules will find it hard to keep their “outside IR35” status. Also long-term contractors who are clearly caught by IR35 will have no option but to accept “inside IR35” status if they wanted to keep their current contracts.

Impact on accountants who act for contractors

The public sector IR35 reforms shifted the IR35 compliance burden from public sector contractors onto hirers and agencies. Typically, the hirer is responsible for determining the contractor’s IR35 status, and the agency calculates and processes the contractor’s tax if he is deemed to be inside IR35.

Contractors caught by IR35 have traditionally sought their accountant’s guidance on how to treat their income. However, as we have seen for public sector contractors, they have been placed on a payroll and now have income tax and National Insurance Contributions (NICs) deducted at source - all of which negates the need for running a limited company and therefore having an accountant.

Accountancy firms that don’t ensure their clients are genuinely operating outside IR35 by the time these same IR35 reforms hit the private sector, may find themselves with a sharp reduction in their bottom line as a proportion of their contractor clients no longer need their services.

Should this give cause for concern?

There are certain factors that increase the chances that an accountant’s contractor clients will be assessed as 'inside IR35' if agencies who have little or no experience of IR35, or risk averse firms make blanket ban decisions on limited company contractors. In addition, many organisations have little capacity to test IR35 status or process the new tax rules. 

Uninformed or risk averse agencies and hirers are reluctant to engage contractors who are outside of IR35 and wholesale blanket decisions are seeing many contractors being pushed into umbrella companies to eradicate the compliance burden for agencies and hirers. 

Many contractors have left the public sector altogether and so have retained their accountants’ services. However, when the IR35 reforms come into effect in the private sector contractors will have little choice but to dig their heels in, brace themselves, and fight to prove their IR35 status to clients.

Weighing up the cost

So what might be the financial impact of the IR35 reforms on contractor accountants?

It’s realistic to assume that roughly 30% of current contractors (based on sampling by ContractorCalculator) would find it hard to remain outside IR35. To avoid this, the entire contracting industry would need to ensure contractors were working on projects on a “contract for services” basis and were therefore outside IR35.  That's unlikely to happen.

The reality is that some less proactive accountants will find themselves losing many clients. For a firm with 100 contractor clients who each pay £1,000 a year, that's £30,000 in lost revenue each year.

Some hiring firms, accountants and agencies are already getting ready for the IR35 roll out to the private sector, because they correctly anticipate the risk to their business. It’s crucial that accountants take mitigating action now before the IR35 rules are expanded, and aren’t the ones left with a large client base that will quickly be eroded overnight.

Act Now

This is my four step plan for accountants:

  1. Conduct IR35 testing for all your contractor clients.
  2. Identify the ones that are most likely to be caught.
  3. Proactively help them to stay outside IR35.
  4. Actively monitor all contractor clients as they change contracts, ensuring that they remain complaint.

About Dave Chaplin

Dave Chaplin

Dave Chaplin is a former IT contractor in the City of London, and is founder and CEO of ContractorCalculator, and author of the Contractors' Handbook and Beat IR35: The ultimate guide to IR35 for contractors, agencies and clients.

Started in 1999, ContractorCalculator.co.uk is the leading independent website for the UK contracting industry – most of whom are highly skilled knowledge workers.

Dave Chaplin has lived and breathed contracting since he first took the plunge and became ‘one of the chosen’ in 1997. He spent seven years working as an IT contractor in the City of London on critical, cutting-edge IT infrastructure and development projects for global players like HSBC, Merrill Lynch, Cable and Wireless, and many others.

 
 

Replies

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19th Jul 2017 17:44

My one step plan is:

1. Worry about it if it happens. See MTDfb

And thats about it. if your practice is highly geared on contractor clients then its known risk in what is a fairly lucrative sector. I would lose around 20% of my turnover if they are banned outright, but I would have to suck it up.

The big difference between private business and public sector is that big firms are much less likely to capitulate and decide their contractors fall inside of IR35 and risk losing them. I

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to ireallyshouldknowthisbut
19th Jul 2017 10:38

MTD have lost a lot of it's sub contractor base because of the new IR35 rules. This together with a new mode of working methods, now being seriously considered, may make the Government think twice.

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to ireallyshouldknowthisbut
19th Jul 2017 12:42

ireallyshouldknowthisbut wrote:

The big difference between private business and public sector is that big firms are much less likely to capitulate and decide their contractors fall inside of IR35 and risk losing them.

This is very true, and HMRC will be aware of this - so may consider debt transfer rules to accompany any roll out. Either way, enforcement will be much more difficult because the agency, client, and contractor will be working in sync to bat away an investigation.

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19th Jul 2017 10:46

How does the accountant conduct IR35 testing for clients?
I discuss IR35 with each of my contractor clients and get them to complete HMRC's on-line tool and send me the results. However, I don't feel I can do this for them as only they know the true nature of the working relationship with their client.

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to Technica
19th Jul 2017 12:43

Outsource the compliance work. There are many providers. Type "IR35 Testing" into Google.

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to davechaplin
19th Jul 2017 15:53

Type "IR35 Testing" into Google.

..........and our firm will be on the first page.

This is so transparent as to be pointless trying to big up your services like this!

The way to market on the web is all about credibility. It takes a long time to build, but just doing puff pieces doesn't really work, no matter how good and credible you are people instantly dismiss it.

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By NH
19th Jul 2017 11:00

That plan works well unless the contractor isn't given a choice as has happened with all of my clients in the public sector. Any amount of planning makes no difference at all if the contractor is told by the agency either you go umbrella or you get lost.
In that circumstance whether or not they actually fail IR35 is irrelevant.

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to NH
19th Jul 2017 12:46

Blanket rules aren't legal, since the client is supposed to take reasonable care as the legislation defines. If they operate blanket rules, they have not taken reasonable care, and in theory the tax liability could stay with them, not the agency. This is how the NHS changed their tune, after being challenged on the blanket approach.

Market forces may also provide a disincentive by firms to do this, particularly in niche sectors.

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By SFA
to davechaplin
01st Aug 2017 06:58

davechaplin wrote:

Blanket rules aren't legal, since the client is supposed to take reasonable care as the legislation defines. If they operate blanket rules, they have not taken reasonable care, and in theory the tax liability could stay with them, not the agency. This is how the NHS changed their tune, after being challenged on the blanket approach.

Market forces may also provide a disincentive by firms to do this, particularly in niche sectors.

Only engaging via an umbrella isn't a blanket rule as such - it could be argued that it is an administrative rule. No IR35 determination is made, instead PSB insist all contractors are engaged via an umbrella - difficult to see how to argue against that.

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19th Jul 2017 11:35

The issue with steps 3 and 4 is that they are more often than not things over which the accountant and their client have little or no control.

The end client of the contractor's services will drive the terms and conditions of the engagement, particularly in areas where they can easily move on from any contractor who doesn't agree to their rules and find a new one.

The contractor is forced to either like it, or turn the work down which many can't afford to do.

An expansion of tighter off-payroll working rules into the private sector might cause some end clients to revisit their T&Cs so they don't have to take contractors onto payroll, but as accountants there isn't much we can do to drive that.

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By cfield
19th Jul 2017 12:17

I don't think a roll-out to the private sector is as imminent (or even possible) as some suggest. Banks and other large organisations will not roll over as readily as the NHS and other public sector bodies (although to be fair they were pretty much ambushed by these rules with just weeks to go). Moreover, the contractors themselves will be far more resistant to taking huge pay-cuts and being forced en-masse into umbrella companies than the poor locums who had no choice but to cave in or leave.

If it does happen, I don't think we'll be seeing too many blanket IR35 policies. TFL had to do a U-turn on their blanket policy when contractors started leaving in droves. NHS Trusts have also admitted their blanket policies were wrong, although I'm not sure how many are re-visiting them. Key staff at least should have the clout to demand personal assessments using the HMRC ESS Tool or even just an IR35 compliance report.

That ESS tool turned out to be a lot more forgiving than we expected. Of course, it still fails to reflect the actual law in many ways (e.g. it ignores MOO and does not adopt a "stand-back" approach), but it does pass you if you can honestly claim to be in control of the work. Therefore, the answer is there if engagers can see it. Just make sure the job allows the contractor effective control of the work, and bob's your uncle. Otherwise, lose the contractor and end up with someone not so good instead. I can't see HMRC getting into too many arguments over this with legal departments who know their stuff.

The most likely approach in the private sector will be to show compliance by forcing the more dispensable staff into payroll companies but treating the key staff they don't want to lose with kid gloves and giving them a pass. At the end of the day, that would probably produce the correct outcome, as most key staff at the top level control the work anyway.

Not a lot has been said about the way some of the more unscrupulous payroll companies have been preying on public sector contractors, like locums. They sign them up to dodgy arrangements treating huge slices of their pay as tax free advances and then charge big fat fees. Needless to say, it will be the poor contractors who'll face the music when these schemes collapse. A lot of these firms are being recommended to contractors as preferred options by agencies, who no doubt are getting a kickback but will then wash their hands when things go belly-up.

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to cfield
19th Jul 2017 12:48

cfield wrote:

Not a lot has been said about the way some of the more unscrupulous payroll companies have been preying on public sector contractors, like locums. They sign them up to dodgy arrangements treating huge slices of their pay as tax free advances and then charge big fat fees.

This has definitely been happening, and at ContractorCalculator we have some evidence, and will be writing about it soon. It's pretty shocking what's been going on.

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19th Jul 2017 14:49

Surely if the contractual relationship has not changed, those
who were outside IR35 still are and those who were not still aren't. Oh dear, are you telling me that some contractors claimed to be outside IR35 wrongly and made incorrect tax returns? They had better start making voluntary disclosure to HMRC before the enquiries start. Sounds like extra work for the tax specialist accountants.

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By NH
to tonyaustin
19th Jul 2017 15:10

if we are still talking public sector you have got the wrong end of the stick.
contractors have been told, from now on we are assuming that you are IR35 whether you are or not, and if you don't like it, you know where to go

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to NH
19th Jul 2017 15:26

Unless, of course, you can show and prove otherwise.

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19th Jul 2017 17:12

I'm sceptical of the likelihood of an imminent roll-out to the private sector, given that public sector organisations now appear to be struggling to fill contractor positions.

I think MTD has been a reality check for the view that government can push and push without consequence.

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20th Jul 2017 07:42

Jonathan-AT-Aiteo wrote:

I'm sceptical of the likelihood of an imminent roll-out to the private sector, given that public sector organisations now appear to be struggling to fill contractor positions.

Surely this makes it more likely that it will be rolled out to the private sector?

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to Wild Billy
20th Jul 2017 09:04

You are assuming that the prior levels of supply of flexible short term labour will re-appear once the government starts making life more difficult for everyone equally. You might be right, but if I were a betting man my money would be elsewhere.

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19th Jul 2017 18:02

I'm really concerned by this article.

A contractor's placement will either be inside or outside of IR35 and it would be inadvisable to try and engineer a situation to suit the contractor. The placement is either caught or it isn't.

I am intrigued to know how an accountant's "compliance" solution as you suggest could keep a contractor outside of IR35 if the placement itself deems otherwise.

How would you body-swerve Supervision, Direction or Control if the right to it was preserved by the hirer?

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to Nik Heath
20th Jul 2017 08:28

If the hirer is acting on behalf of the client, then it is the client who dictates supervision, direction and control. In most cases it is always the client who controls, because they are paying the bill.
It will be interesting once the first "test case" hits the courts.

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By cfield
to Nik Heath
20th Jul 2017 08:51

Nik Heath wrote:

How would you body-swerve Supervision, Direction or Control if the right to it was preserved by the hirer?

But SDC does not apply to personal service companies, only to contractors paid as sole traders. A lot of them in the construction industry were being paid under CIS. That's why SDC was brought in a few years ago.

PSCs remain subject to IR35 which is an easier hurdle to jump as it is based on case law rather than the artificially strict and contrived SDC criteria.

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