Contractor Corner Reverting to outside IR35

Welcome to Contractor Corner, the series written specifically by Qdos Contractor for accountants with clients who are contractors.

The implications of reverting to outside IR35

On 17 March 2020, just two weeks before the expected implementation of the contested off-payroll rules (IR35 reform) in the private sector, the Government announced that the incoming rules would be postponed until 6 April 2021 in response to Covid-19.

While this was a welcome decision for businesses struggling to cope with the burden of the pandemic and for those who had left their preparations for IR35 late in the day, for many businesses this meant the reversal of policy decisions to ban the use of PSC contractors, wasted status determinations and a lot of confusion at an already troubling time.

Qdos surveyed over 1,000 contractors following the announcement of the delay and found that 56% of those who had been assessed as inside IR35 (52% of respondents) expected to return to outside IR35 working.

This is likely in large part due to a lack of faith contractors have in the determinations they are being given – many of which are being made by HMRC’s flawed CEST tool, and the 40% of contractors who have reported to being subject to a blanket assessment. However, following the welcome delay to IR35 reform, our research indicates that 32% of contractors forced inside IR35 have had this decision reversed.

Now with a further 12 months in which contractors can determine their own status in the way they have for the past 20 years, it is no surprise that the majority intend to take this opportunity.

However, it is important for contractors to consider whether their contract actually belongs outside IR35 before operating outside the scope of the legislation. While, in our experience, the vast majority of contracts and working practices do truly belong outside IR35, it is crucial for contractors to ensure they carry out their due diligence and ensure their compliance.

During an IR35 enquiry, end-client involvement and, more importantly, agreement of a contractor’s status can be pivotal in the result. So if a contractor decides to reject a determination given by the client, it is important that they are able to fully evidence their position. An independent IR35 contract review offers an expert and objective view of status.

It is also advised for contractors to take out IR35 insurance, as the liability will now rest with the contractor for a further 12 months. Contractors will also maintain any historical risk for tax years prior to April 2021.

While many in the contracting industry have been hard hit by the Covid-19 pandemic, as businesses begin to reopen and projects restart it is expected that companies will rely on the flexibility and skills of independent workers while the situation remains uncertain.

For contractors who have reverted back to outside IR35 working, and those preparing to take on new projects outside the clutches of the legislation, IR35 compliance remains vital.

House of Lords deem IR35 reform ‘flawed and unfair’

Released in late April this year, the House of Lords published a 67-page report titled ‘Off-payroll working: treating people fairly’, in which the Committee drew a number of damning conclusions of the off-payroll rules (IR35 reform). Perhaps most significantly, the report noted that IR35 hasn’t worked properly “throughout its 20-year history” and described the legislation as “riddled with problems, unfairnesses, and unintended consequences”.

IR35 reform (now postponed until April 2021) will see medium-large businesses determine the IR35 status of their contractor workforce. The incoming reform has resulted in numerous reports of blanket determinations, bans on PSCs, ill-considered assessments, and an increased use of umbrella companies.

While the Committee supports the 12-month delay to IR35 changes in the private sector, the Lords urged the Government to use this time to “reconsider its proposals, paying greater heed to wider changes in working practices.”

‘Zero-rights employment’

The report honed in on the biggest flaw of the rules and IR35 in general, in that it creates ‘zero-rights employment’ when a contractor is placed inside IR35 – a status more contractors are likely to face when the reform is enforced. Inside IR35 contractors are subject to the tax of an employee but receive none of the rights associated with the status, such as a pension or holiday entitlement.

Referencing Matthew Taylor’s ‘Good Work’ report, which suggested the Government aligns employment status for both tax and employment rights, the Committee stated that the “treatment as an employee for tax purposes should only apply where there are employment rights and risk-sharing between employer and contractor”.

The Committee also brought to light that despite the Government agreeing with the Taylor Review (that tax and employment frameworks should be aligned and that the Government put forward that it would develop detailed proposals for how this could happen in December 2018) to date (18 months later), no such proposals have been published. This raises serious concerns “that the Government has pressed ahead with the off-payroll working rules at a time when the Taylor Review, which it commissioned, recommended a more holistic solution than these rules can offer.”

• Qdos Contractor is a leading authority on the IR35 legislation having successfully defended over 1,600 IR35 enquiries over the past two decades. See www.qdoscontractor.com/ir35

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