Contracting IR35 reforms, known as ‘Off-Payroll’, set to cause reduced contractor numbers

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Contractor fired from job

Contracting IR35 reforms, known as ‘Off-Payroll’, set to cause nearly half of businesses to reduce contractor numbers

Contractors may face a dwindling number of end-clients that are willing to engage them on a self-employed basis after the expansion of the contracting IR35 tax rules into the private sector, new research has revealed.

The independent research of more than 500 medium- and large-sized UK businesses revealed that nearly three-quarters (73%) of businesses believe that Off-Payroll will have an impact on the number of freelancers that they hire, and nearly half (48%) plan to reduce the number of freelancers that they hire in order to avoid the impending financial burden.

The Off-Payroll rules will move the responsibility for making contracting IR35 assessments away from contractors and onto the organisations that hire them. In cases where the contractor is deemed to be operating under the same terms as a permanent employee would, their recruitment agency or end-client may become responsible for deducting PAYE taxes and National Insurance from their fee at source.

When a contractor is deemed to be on the same lines as a permanent employee, instead of an independent contractor, they are said to be working ‘inside IR35’ and are subject to PAYE and National Insurance. In this case, the employer would work out the tax for the contractor. If a contractor is said to be working ‘outside IR35’ they are deemed self-employed and are responsible for their own tax implications.

The changes are meant to ensure tighter IR35 compliance, but critics warn that the complexity of IR35 assessments, combined with the risks attached to making “outside IR35” decisions, may lead an employer to “play it safe” and operate what has become known as a “blanket” policy of simply placing all external contractors within the IR35 rules.

This “safe play” could lead to the demise of the independent contractor, who will appear undesirable in the eyes of an employer or service company. More than half (59%) of the organisations surveyed in the research by Brookson Legal admitted to having considered taking a “blanket” approach to managing the Off-Payroll legislation once it takes effect.

HMRC insists that this would be non-compliant with the new rules, as end-clients will have a legal responsibility for making the assessments to the best of their ability. However, the online Check Employment Status (CEST) tool that the tax authority has designed to assist with the complicated assessments has proven inaccurate, and also shows a tendency to lean towards making “inside IR35” decisions in borderline cases.

HMRC has suggested amending the draft rules – the consultation for which ended yesterday – to include an arbitration procedure for freelancers that feel they have been incorrectly assessed; however, said arbitration procedure would be handled by the business who made the decision, which, for many, would represent a conflict of interest.

“Procedural fairness can only be guaranteed where the circumstances and evidence of the engagement are impartially assessed by an independent and competent decision-maker,” explains Martyn Valentine, director of The Law Place. “HMRC’s proposal of a client-led process falls way short of meeting this requirement.”

Joe Tully, managing director of Brookson Legal, said: “Whilst it is heartening that many businesses wouldn’t consider taking a blanket approach to this legislation, the fact that 59% of UK businesses are actually considering doing this is shocking considering the well-publicised impact of this approach in the public sector.

“Businesses may see this blanket IR35 approach as a quick fix but it is anything but and should be avoided at all costs. Far from saving businesses time and money, this approach will lead to serious repercussions – leaving businesses wide open to increased cost, a wide-scale contractor talent drain, reputational damage, and, in some cases, accusations that they have broken the law.”

The research forms part of Brookson’s recently published IR35: A Ticking Timebomb report.

The Brookson Legal research also revealed:

  • 77% of clients were concerned that all or some of their contractors previously not captured by IR35 will now find themselves subject to the regulations. 9% didn’t know, and 14% said they were not concerned.
  • 47% of firms had taken steps to anticipate the increased IR35 risk that Off-Payroll will represent in terms of the proportion of contractors that will fall under the new rules. 38% said they were relying on a ‘gut feel’ of their exposure, and 15% had no idea at all of their exposure/risk.
  • Only 24% of respondents claimed that Off-Payroll won’t make any difference to their hiring of contractors, due to contractors being “vital for their businesses”. % of those surveyed expected to be taking on more contractors in the future, regardless of Off-Payroll.

When asked what firms’ biggest fears are with regards to IR35, the top three were:

  • Loss of access to skilled contractors – 33%
  • Increased costs – 32%
  • Making incorrect IR35 determinations – 32%

Only 9% of businesses didn’t have any concerns related to Off-Payroll.

Joe Tully concluded: “78% of businesses are already being asked questions about IR35 by their contractor workforce, and risk alienating and losing this workforce if they don’t have any answers. 41% of businesses are not considering taking a blanket approach and it is these businesses that will have the competitive advantage by showing that they are taking their IR35 obligations seriously.

“The new IR35 off-payroll rules come into force in April 2020 but the time for UK businesses to put their IR35 house in order is now. By undertaking proper audits, and seeking expert advice, businesses will be able to illustrate that they are taking ‘reasonable care’ with their IR35 assessments and will almost certainly find that the impact of IR35 is not as far-reaching as their own gut feeling leads them to believe.”

29th May 2019.