Contractor firms brace for private sector IR35 rollout
With a huge number of clients going on the payroll, what will this mean for firms specialising in the contractor market? How can these firms escape a contracting client base?
The roll out of the off-payroll rules in the private sector from the 6 April is going to cause a lot of disruption for accountancy firms. The rules have been a long time coming, with the reforms delayed 12 months in 2020 as part of the government’s Covid-19 response package. But this has done little to stop the erosion of accountancy firms’ client base.
At the end of 2020, AccountingWEB user Ireallyshouldknowthisbut listed their main challenge this year as replacing lost clients due to IR35 rule changes. Other AccountingWEB readers have reported how these ‘IR35 clients’ have been “dropping like flies” since January 2020.
However, the picture is looking a little more upbeat for firms as the 6 April roll out approaches. On this week’s Any Answers Live, 57% of the audience said the rules will have a marginal impact on their practice but they haven’t changed how they operate.
Chris Maslin, an accountant for contractors, explained on Any Answers Live how his firm has lost a lot more clients than they’re used to over the last 12 months. The firm is still taking on roughly the same number of clients as they always were, but they’ve seen a more marginal dip than growth.
“From a financial perspective we are losing clients, but from work that needs to be done, that hasn’t gone down yet,” he said.
“Our senior staff have been busier than normal - some of it quite depressing work in helping people basically move on to the next stage of their life.”
Strategy to mitigate impact
There is no escaping the fact that the private reforms have hit some firms harder than others. In the Any Answers Live poll, 14% admitted that they have lost a “considerable amount of clients”.
Maslin managed to mitigate the impact through the firm’s sister company MVLOnline, which liquidates limited companies.
“So when it comes to limited company contractors, there is an element of the ‘sunglasses and umbrella route,’” he said. “There are a lot of previously successful limited company contractors that don’t need their company anymore. So that business is doing quite well.”
Maslin did try other avenues, such as having their own umbrella company. But he admitted that it didn’t end up working out for the firm.
“A lot of PSC contractors have been pushed towards umbrellas as a way so the end client doesn’t have them on payroll. From the end client’s perspective, they’re still a contractor. We tried approaching a few providers where we’d hoped to have set up a joint venture. But that didn’t come off.”
How has the IR35 reform impacted your practice?
Move away from contractor clients?
Naturally, the reforms have caused some firms to reconsider contractor clients. In the poll, 5% of respondents said they’ve now switched to a different niche.
While some have washed their hands with contractor clients, Maslin has stood firm and not switched to a more generalist approach. Each firm will have to make their own call, but he said “you can’t totally reinvent your business everytime the wind goes against you. There can be times in business where you have to do something different but I don’t see this as being like that.”
Although he did share some concerns for contractor accountants that have cut it fine with staffing levels.
“There are some firms out there, to keep profits high, would run on minimum staffing levels that just about cope - but when you throw a spanner in the works like this you’re now starting to see comments on forums such as ‘my accountant promised to get my corporation tax three months ago and I am still chasing’,” he said.
What does the next 12 months look like?
The 6 April rollout will undoubtedly be a shift for the contractor market. Maslin even admits that his optimistic outlook is one which some might view as “naively optimistic”.
However, he knew for a long time that it was coming and he’s confident that his firm will survive it. “It’s a blip, we’ll take it on the chin, it’s not killing us and we’ll move on.”
So what does the future hold? Maslin expects there to be a short term over-exaggeration towards inside IR35, while some big corporates that will still offer outside IR35 contracts.
“I like to think because you’re going to have the contractor and end client aligned on this, that both parties want it to be very clear that it is outside IR35, it will be much easier for them to win HMRC challenges,” he said.
“If you go back three or four years, the contractor wanted to be outside IR35 but the end client didn’t care. So sometimes they’d let slip something, use poor choice of words or put unfortunate terminology in contracts that stitched the contractor up.”
However, Maslin expects the next 6-12 months to be tough for the market and he doesn’t have any “magic tricks to beat that”.
“I’m of the view that limited company contracting is not dead. But it will be a rough time. The next 6 months are going to be worse than the last 12 months because there are alot of companies there that have been waiting to see how this turns out. But from 12 months onwards we’ll be back to the new normal.”
This episode of Any Answers Live is now available on demand. Join Chris Maslin and Rebecca Seeley Harris as they answer viewers’ questions on IR35 and provide an overview on what is changing and when.