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What does the future hold for contractors

IR35 reform in the private sector is just around the corner. In this article Seb Maley outlines the current state of play and looks to the future.

Two years after being announced by former Chancellor Philip Hammond, and with one dramatic delay thrown in for good measure, IR35 reform in the private sector is very nearly here.

Having been postponed last year by 12 months due to Covid-19, this controversial tax reform will come into effect on 6 April 2021 and see medium and large businesses pick up the responsibility for determining the IR35 status of contractors they engage.

As part of the changes, which mirror those rolled out in the public sector four years ago, the liability will shift from the contractor to whichever party is tasked with paying the worker – that is, assuming all legal obligations are met in the supply chain.

So where are we now, as we sit so close to one of the biggest moments in the history of this notoriously complex, often misinterpreted and misapplied tax legislation?

Are private sector businesses taking a sensible approach to the incoming changes? Or, as mooted, will there be a noticeable shift towards PAYE working among contractors?

Reason for optimism

Things are shaping up perhaps better than expected – certainly, from where we stand here at Qdos, businesses are far more organised and measured in their approach to IR35 reform compared with the public sector changes in 2017.

By this, I mean that thousands of companies are taking the steps necessary to continue engaging contractors compliantly outside IR35 going forward. Qdos is supporting more than 2,200 of them, allowing for tens of thousands of well-informed and fair IR35 status determinations.

This can only be a good thing for accountants who support independent professionals.

But there is room for improvement

True, not all organisations are being pragmatic about the reform. All you have to do is Google ‘IR35’ and you’ll find dozens of stories that paint a worrying picture about the future of contracting.

Whether it’s non-compliant blanket IR35 determinations that see all contractors placed inside IR35 irrespective of their status or ultimatums – ‘work via an umbrella company or as an employee or have your contract terminated’ – these reports are a cause for concern.

However, I should point out that news coverage about businesses adopting a risk averse strategy to IR35 reform – decisions that needlessly force contractors onto the payroll – is not representative of the entire private sector. Far from it, in fact.

Contractor bans must be reversed

Do I think, realistically, that the firms who have already set out their stall and stopped engaging contractors will make a dramatic U-turn? Some, perhaps. Definitely more as time goes on, when these businesses see their competitors reap the benefits of retaining their contractor workforce.

It is, however, inevitable that pockets of businesses will uphold blanket bans. As you might already know, there is plenty of room for improvement in the financial services sector, in particular. Many of the big banks are yet to be convinced that, contrary to speculation and in some cases scaremongering, IR35 reform is manageable.

In the coming months and beyond, the Qdos team will be working tirelessly to get this message across to all businesses impacted by IR35 reform and in turn protect the contractor workforce that relies so heavily on the expertise of Accounting Practice readers.

Questions being put to Qdos

Having spoken to many accountants in recent months – a number of whom read this very magazine, no doubt – I know there are plenty of questions they would like answered with regards to IR35.

One that regularly crops up from accountants interested in learning how the demand for their services may be affected by IR35 reform is: “How many contractors will continue to work inside IR35 having been placed there by their client?”

In all honesty, I don’t envisage a great number. After all, the benefits of working inside IR35 – where the contractor is subject to employment taxes but doesn’t receive any employment rights in return – are few and far between.

Unless a contractor can negotiate a significant rate rise with their client to compensate for the PAYE tax deducted from their timesheet or invoice, in my opinion these contractors are more likely to work via umbrella companies – a vehicle through which they receive employment rights for paying significantly more in tax.

And in many cases it may not even be a contractor’s choice. Businesses could simply enforce umbrella working, as mentioned earlier on in this article. The way firms may see things is that if a contractor belongs inside IR35, engaging them via an umbrella company is a more convenient arrangement.

After all, the IR35 rules don’t apply to umbrella working and the umbrella company will be responsible for deducting taxes and paying them to HMRC. In other words, the tax burden is relieved from the hiring business.

Another question put to me recently was: “What accountancy support, if any, will contractors need if they do operate inside IR35?”

The answer is, unfortunately, very little – for the contract that falls inside IR35 anyway. The ‘deemed payment’ owed to HMRC as a result of working inside will cease to exist. This is because fee-payers will deduct the tax at source before settling up with HMRC.

That said, given businesses qualifying as small under the Companies Act 2006 are exempt from IR35 reform, contractors operating inside the scope of the legislation and engaged by a small company are likely to still need assistance with regards to the deemed payment.

On this note, I should reiterate that contractors engaged outside IR35 – of which I am confident there will be plenty – will need the same support from accountants as before. As you’ll no doubt be aware, this is because genuine contractors will retain responsibility for reporting and paying their tax.

Accountants have a vital role to play

It goes without saying that accountants – as trusted advisers and recognised experts – have an important role to play in helping contractors emerge from under the cloud of uncertainty created by IR35 reform.

Not only that, but it is in an accountant’s best interests to help ensure that contractors who belong outside IR35 continue to work outside the clutches of the legislation beyond 6 April. So in the coming months, leading up to the introduction of the changes and even after their long-awaited arrival, my advice to accountants is to proactively support contractors.

The fact of the matter is that in most cases these individuals will lose the right to decide if they are self-employed or employed for tax purposes, but that’s not to say their fate is sealed. There are a number of ways contractors can look to protect their IR35 status.

This can be done through independent IR35 status reviews that can be used to safeguard status or challenge unfair determinations made by firms or by making it absolutely clear that a contractor thinks, acts and operates as a genuine business.

Contractors also need to be aware that HMRC can and will continue to target them retrospectively, scrutinising engagements that were completed before 6 April – a time when the worker carried the IR35 liability.

While, broadly speaking, HMRC have said contractors whose IR35 status shifts from outside to inside IR35 upon the arrival of reform will not be investigated, the tax office haven’t ruled this out completely. The door has been left ajar, with HMRC able to open up enquiries into these  contracts if “there is reason to suspect fraud or criminal behaviour”.

With all of this in mind, IR35 insurance will remain an important policy for contractors in years to come – and a product that accountants can and should continue to offer to clients as part of their wider range of services.

To sum up, and looking ahead to the post-IR35 reform contracting landscape, there is cause for cautious optimism and by no means will contracting die out, as has often been speculated. I won’t lie: there is still work to do, but I’m confident that businesses will continue to engage contractors outside IR35 reform going forward. After all, there’s no arguing with the fact that in  uncertain economic times, it is contractors who can be counted on to help firms negotiate choppy waters.

Seb Maley is Chief Executive Officer at Qdos Contractor.

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