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.
This is my four step plan for accountants:
- Conduct IR35 testing for all your contractor clients.
- Identify the ones that are most likely to be caught.
- Proactively help them to stay outside IR35.
- Actively monitor all contractor clients as they change contracts, ensuring that they remain complaint.
About 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.