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Contractors Corner

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

Some 88% of contractors do not believe accurate IR35 decisions can be made without their input
In one fell swoop, April’s rather unwelcome reform to public sector IR35 took away a contractor’s privilege to set their own employment status when working on public sector contracts.

Now, without much say in the matter, many public sector contractors wait nervously as IR35 assessments are made by relatively inexperienced clients and agencies, often with the help of HMRC’s questionable IR35 tool. It’s little wonder there was such concern in our sector the moment these changes were announced. Contractors’ ill-feeling towards IR35 itself, the reform (and HMRC for that matter) is entirely understandable. That employment status decisions and in-effect, the responsibility of setting IR35 status should be taken away from the contractor and passed over to a public sector engager has been a bold, but ultimately unpopular move.

This is reflected in our latest contractor research, which has revealed that as many as 88% of contractors surveyed do not believe public sector companies or agencies are able to make accurate IR35 decisions without their input. It’s logical thinking. After all, how can one make a well-informed IR35 decision without valuable input from what is undoubtedly the most vital component – the contractor?

Granted, HMRC’s ESS Tool is being continually tweaked on-the-fly in an attempt to iron out its inconsistencies. But many simply view this as a root of its problems, rather than a solution to them. That HMRC’s ESS Tool has clearly been built with the end-engager in mind is a shortcoming. Greater collaboration between contractors and end engagers is needed to be sure of more accurate IR35 decisions. It’s obvious. If as a public sector contractor, your client or agency is using HMRC’s ESS Tool to set your IR35 status, it’s important that you have carried out a separate and unbiased IR35 review – whether that’s to appeal against an IR35 decision, or simply to keep for your own records. As we all know too well, IR35 is a complex subject, so independent and expert advice will make things easier for you. It’s clear that reform to public sector IR35 has made working on these contracts an altogether less attractive proposition. Our research also suggests that of the contractors with experience of working in the public sector, 66% do not intend to again.

That two-thirds of contractors are not interested in working on public sector contracts again is obviously concerning, not just for contractors, but for the public sector too. But it’s worth bearing in mind that this figure once sat even higher (85%) prior to April 6, the day on which changes were enforced.

On that note, it’s important to take into account that change is afoot. And slowly but surely, a growing number of public sector organisations and agencies who – on 6 April – were quick to make widespread IR35 assumptions in an attempt to safeguard themselves, have realised this is not the way forward.

NHS changes mind on IR35 status for contractors
In one of the latest bits of news around IR35 in the public sector, it has been revealed that the NHS are revising their original standing on whether or not a contractor providing services to them would be seen as being inside or outside of the Intermediaries Legislation (IR35).

Originally, the NHS took the standing that they had “anticipated that providers would need to ensure that all locum, agency and bank staff were subject to PAYE and on payroll for the new financial year”. Which essentially boiled down to the NHS operating a generalised “all contractors operating with us are inside of IR35, regardless of individual circumstances” standpoint. This was (understandably) quite unpopular with most of their contractors as this would mean they take a loss in earnings irrespective of how they are actually operating in reality. The NHS has now revised that opinion and have now stated that blanket statements in relation to determining IR35 status are “not accurate” and that each decision needs to be made on a “case-by-case basis, rather than a broader classification of roles”. What this means in short is that the NHS has stipulated that each NHS trust must determine a contractor’s IR35 status on its own merits and not rely on assumptions that an individual is inside.

Unfortunately, this news might be coming a little too late for a good number of NHS contractors who have already either left the public sector to provide services elsewhere, or have opted to move into umbrella company contracting as the only viable route left to them. There are also rumours that the reason the NHS came to a revised conclusion is due to the threat of a large number of specialist contractors leaving their roles unless the NHS change their standing. While a win for the contractors providing services to the NHS, it is however likely to prove rather costly for the NHS itself as implementing a more balanced approach will increase administrative overhead and may prolong the onboarding process for new contractors who have yet to have their status determined.

Regardless of the rumours, this is a rather important step for contractors as it shows that public sector bodies can and will change their mind over blanket policies and implement a more fair and balanced approach so it is absolutely worth speaking to your client if you believe their opinion on your status is inaccurate if they haven’t considered all the facts of your engagement.

Potential private sector reform is UK contractor’s top concern
The Public sector IR35 reform is widely considered a test-run before similar changes are rolled out in the private sector. However, given the sheer panic and confusion that ensued upon the announcement and subsequent arrival of the new public sector IR35 rules, any move to introduce such changes to the private sector will not be a popular one.

This is echoed by 48% of contractors in our latest research, which revealed that rumoured change to private sector IR35 is their number one business concern. Put into context, this dwarfs the 18% of contractors who are most worried about competition for contracts by more than two-and-a-half times. That pertinent issues such as the lack of Government support for the self-employed (17%), ongoing fear over public sector IR35 changes (10%) and a variety of other pressing business concerns (7%), are considered less important to UK contractors just goes to highlight how worrying rumours around private sector IR35 reform really are for many UK contractors.

Concern among contractors that IR35 reform will be extended to the private sector is very real. But given the chaos caused by recent public sector reform, would any move to make changes to private sector IR35 be wise? Arguably not. Qdos Contractor is working closely with a number of public sector bodies and agencies, working hard to ensure the fair and continued use of contractors in the public sector. And while our work has been instrumental in reversing a number of inaccurate blanket IR35 determinations, the Government would have been wise to allow contractors, public sector organisations and agencies more than the year given to prepare for such seismic changes to UK contracting and public sector hiring.

To rush through similar changes to private sector IR35 is not advisable, given the concern voiced by the UK contracting community, not to mention the recent chaos caused by changes to public sector IR35. If private sector IR35 reform is rolled out in a similar fashion to April’s public sector reform; hurriedly and without the level of input needed from our industry’s most influential voices, we could have a repeat performance on our hands. While the largest proportion of contractors surveyed (36%) revealed they would continue contracting regardless of private sector IR35 reform, a concerning 33% of contractors stated they would consider heading into employment. Around one in five contractors (19%) are prepared to consider a different career altogether should private sector IR35 be reformed, while 12% have alternative plans – the most common of which include retiring early, or emigrating to continue contracting overseas without the danger of IR35 hanging over their head. Judging by this set of survey results, the Government would be shooting themselves in the foot.

While it’s clear that drastic changes to private sector IR35 would not be welcomed, it’s telling that the largest percentage of contractors would indeed continue working independently regardless of any changes to IR35. The vast majority of the UK’s independent workforce choose to work this way for the freedom and control it brings, rather than the tax advantages.

Whilst there has been no formal confirmation that IR35 reform will extend to the private sector at this stage, the general feeling among many industry experts is that it is not a matter of ‘if’ but ‘when’.

• Thanks to Qdos Contractor for these articles

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