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IR35: There’s no turning back

20th Jan 2017
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No turning back
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Dave Chaplin reflects on the upcoming IR35 changes.

From April 6th 2017, HMRC is pressing ahead at full speed to introduce some new changes into the public sector, whereby clients will have to check whether their contractors pass IR35 or not.

Most hirers will not have the expertise to understand whether IR35 applies and the net result will see a public sector talent drain, a reduction in the quality of public service delivery and higher costs for the taxpayer.  It’s a lose-lose situation for all parties.

To date, 21 IR35 cases have gone to court, on top of the hundreds of employment tribunals that have established the case law over decades. Some cases aren’t as important as others. Some results have surprised experts.  What is clear is that without expert knowledge it is near on impossible to evaluate a contract as a layman. So, who in the public sector will be responsible for assessing these 20,000+ contractors when these new rules kick in? 

HMRC claims that its yet-to-be-released online tool will give a clear Yes/No answer in 95% of cases - which is incredibly ambitious. Building a simple tool can’t be done. The finest legal minds haven’t been able to boil down decades of employment case law into an IR35 questionnaire that provides a binary result. How HMRC is going to achieve it is anybody’s guess. Expert sources who have seen the current beta are telling us that the bar has been set artificially high and that 90% of all contractors would fail the HMRC test, despite what the legal reality actually is.

Shortly after the introduction of IR35, we developed our own free online IR35 test in conjunction with tax experts. It took a full year to develop and has been repeatedly refined.

The outcome from this subjective test can only give an answer on a spectrum with no definitive result.  Of the 95,000 contractors who have taken the test to date, 40% are borderline. In other words, computer says ‘don’t know - you need to speak to an expert’. That’s the problem. Employment status lies on a spectrum, and there are clear passes and fails – but the borderline cases require human assessment.

Our concern is HMRC will err on the side of caution and those who are hovering between pass and fail will automatically be deemed “not passed”. You’ll then have contractors who are outside IR35, whose advisors tell them they are outside IR35, battling public sector departments who have been strongly encouraged to use a tool which wrongly informs them the contractor should be caught. It’s a total mess.

We could see a scenario whereby many disgruntled contractors judged to be inside IR35 attempt to claim statutory employment rights at an Employment Tribunal (EAT).

Suppose a contractor has been operating outside of IR35 for over a year with the same public sector client who now says they must be inside IR35. If the contractor agrees, they are exposing themselves to considerable IR35 for their historic work and a position they may have no option but to protect.

Ironically, if the contractor puts up a weak defence at an employment tribunal to prove they are an employee and loses, they then get the result they really preferred anyway. They will have protected the historic position, but are unlikely to have a client anymore.  We could be looking at thousands of Employment Appeal Tribunals come April as contractors work hard to prove their status.

These reforms have been ill-thought through and will lead to an exodus in talent significantly impacting already stretched public sector services.  The UK labour market needs the flexibility and expertise provided by contractors. The point of hiring contractors via personal service companies (PSCs) is to hire short-term expertise on tap.  Economic growth will only be stimulated by allowing contractors the freedom to contract without fear and clients the freedom to source expertise when they need it without the spectre of employment tribunals.  Brace yourself – 2017 is going to be anything but smooth.

 

Chaplin is the author of Beat IR35: The ultimate guide to IR35 for contractors, agencies and clients available at https://www.amazon.co.uk/dp/1520317492 .  The book provides readers with all the expert knowledge they need to stay compliant, reduce tax risk, avoid punitive IR35 taxes, and successfully combat any HMRC investigation.

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By hiu612
23rd Jan 2017 10:53

"How HMRC is going to achieve it is anybody’s guess"
Simple:
1. Data entry
2. Result - employment relationship exists
3. Public body - we can bully you and you don't have shareholders, so take PAYE on our behalf

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By vstrad
23rd Jan 2017 11:40

Disguised employment must be employment. ET, here we come!

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By andyhopkins
23rd Jan 2017 11:47

I'm always curious when people claim "will lead to an exodus in talent" -where are these people going to? It's not like the private sector crying out for them.

More holistically, I'm not sure IR35's required to stem (massive) tax loss now the dividend tax has been introduced.

I think there's a far bigger net loss to the Exchequer through people forming companies and letting them disolve without ever accounting for taxes. And non-IR35 tax avoidance issues (multiple "mini-companies" to take the mickey on 'ers NI allowances and VAT flat rate for temporary workers employed through agencies springs to mind).

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Replying to andyhopkins:
Dave Chaplin
By Dave Chaplin
23rd Jan 2017 12:05

andyhopkins wrote:

I'm always curious when people claim "will lead to an exodus in talent" -where are these people going to? It's not like the private sector crying out for them.

Many of the IT crowd and engineers are ready to jump ship and there is plenty of work elsewhere. If on the other hand you design missiles you are a bit scuppered. Rates will need to just go up.

Bear in mind that the public sector bodies don't like this. They don't want to have contractors inside IR35, because rights become an issue too under the Agency Workers Regulations. Cake and eat it.

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Replying to andyhopkins:
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By uchenna209
23rd Jan 2017 22:50

I know right. It's hard to break into the private sector from public sector. You get pigeon holed into the public sector.

I suspect most public sector contractors will go on payroll.

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By andyhopkins
23rd Jan 2017 11:47

I'm always curious when people claim "will lead to an exodus in talent" -where are these people going to? It's not like the private sector crying out for them.

More holistically, I'm not sure IR35's required to stem (massive) tax loss now the dividend tax has been introduced.

I think there's a far bigger net loss to the Exchequer through people forming companies and letting them disolve without ever accounting for taxes. And non-IR35 tax avoidance issues (multiple "mini-companies" to take the mickey on 'ers NI allowances and VAT flat rate for temporary workers employed through agencies springs to mind).

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By Sue59
23rd Jan 2017 12:15

The exodus will be to private healthcare companies such as CareUk and Virgin running urgent care centres where these rules won't apply. One has to wonder if this is the governments intention. Or the many healthcare staff working to supplement their pensions who will decide it's not worth the bother.

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By raybackler
23rd Jan 2017 12:53

It will see a public sector talent drain. The best will get work in the private sector and the worst will probably end up on the payroll.

The rules will be applied by the public sector to protect their position, i.e erring towards the contracts being inside IR35.

It seems likely that sights will be set on the private sector next and the flexibility in the labour market for project work will virtually disappear. Everyone loses.

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By geoffmw1
23rd Jan 2017 14:04

This is all about the usual problem that an HMRC worker is pretty well always going to be on PAYE and the mindset becomes "if I can't pay less tax nor can you"

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Replying to geoffmw1:
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By billwork
24th Jan 2017 12:32

I agree that that is the HMRC mindset but don't forget that this change is politically driven. Remember all that media reporting of BBC producers, celebrities etc being paid off-payroll? MPs - especially those of a Conservative persuasion - hate the thought of anyone in the public sector being paid more than them or paying less tax.

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By raybackler
25th Jan 2017 23:00

Had my first client yesterday saying could I provide a reference as he was leaving the public sector to go private.

Great timing after my post!

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By lizg247
03rd Mar 2017 13:08

Please can I have some opinions:
Client contracts for a major blue chip PRIVATE sector company who has a main onsite agency that sources contractors for their company.
Between the company and the agency they have decided that they will now start to enforce IR35 changes onto "general" contractors (i.e. low level 1's and 2's - levels go from 1-5). They have told those that are coming up on contract renewals that they will be renewed for a three month period as a Ltd company contractor they then have to make a choice during this period - either switch to umbrella/PAYE and then get renewed onto a 12 month contract (usually it's just done in 6 month periods) or leave.
Can anything be done to challenge this or is it just a case of hard luck on the client's behalf and they either change or leave. Is there an argument here that can be legally supported?
Any thoughts or guidance would be appreciated.

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