Home Self-Employed Half of end-clients yet to prepare for IR35 reform

Half of end-clients yet to prepare for IR35 reform

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A new survey of more than three thousand contractors has revealed that 52 per cent of those currently in work have yet to have had their IR35 status assessed by their client in preparation for the extension of IR35 reforms to the private sector in April.

The research, entitled IR35 Road Ahead, polled 3,320 contractors about the new IR35 rules, officially known as the Off-Payroll rules, that will shift the responsibility of assessing IR35 status from contractors to the companies that hire them.

The firm that carried out the research, IR35 shield, said that the survey also highlights “the risks that hirers and agencies run by attempting to circumvent their compliance obligations, including recruitment struggles, rising costs and damage to projects”.

The IR35 reforms were due to be introduced last April but were postponed for twelve months due to the coronavirus pandemic.  Before they were postponed, a number of major hirers of contractors imposed bans on contractors operating through their own limited companies in order to eliminate their compliance risk under the new rules.  Some companies reversed these policies after the government announced that Off-Payroll was being postponed for a year.  However, this month’s research reveals that 23 per cent of contractors still report that their end-clients have limited company bans in place.

In order to assist the hirers of contractors with the notoriously difficult process of making IR35 determinations, HM Revenue & Customs launched an online tool, CEST, to help with the task.  CEST has been blighted by criticism of inaccuracies since its launch, even after a major overhaul in November 2019.  The IR35 Road Ahead poll shows that 52 per cent of end-clients are now using the tool to determine IR35 status, despite 75 per cent of contractors believing that it remains inaccurate.

Other key findings include:

  • 72 per cent of contractors will seek a different rate for “inside IR35” engagements
  • 65 per cent of contractors will avoid working “inside IR35”
  • Only 8 per cent of contractors said they would be happy to use an umbrella company
  • 74 per cent of contractors cannot tell if an umbrella company is compliant and are therefore vulnerable to tax avoidance schemes

The IR35 Shield research follows a similar poll by Qdos Contractor published last week that revealed that more than half of end-clients had yet to communicate with their contractors at all about the reforms.

“It looks as though half of the market is leaving Off-Payroll compliance until the very last minute, which looks likely to cause some unnecessary complications and a considerable demand for assessments in a very short time window,” said Dave Chaplin, CEO of IR35 Shield.

“Firms using CEST to conduct status assessments or who apply blanket rules to negate their compliance obligations are likely to encounter considerable disputes and recruitment struggles.  Meanwhile, unfair tax treatment and a lack of transparency when it comes to engagement models by agencies and clients threaten to push contractors unwittingly into tax avoidance schemes.”

A major criticism of the Off-Payroll rules is that they encourage the hirers of contractors to make so-called “blanket” assessments, where contractors’ employment statuses are assessed in bulk, rather than on an individual basis.  Worryingly, only 34 per cent of contractors indicated that their current client was assessing IR35 status using the correct case-by-case approach.

Whilst 23 per cent of contractors that were in contract reported that their clients have blanket limited company bans in place, when looking at the respondents who were out of contract, this number rose to 41 per cent.  32 per cent of those who were between contracts said their most recent contract had been terminated because of IR35 concerns.

IR35 shield said: “Though the prevalence of blanket bans by clients of currently engaged contractors remains high, the comparative figures suggest that clients that abide by their compliance obligations and assess contractors individually stand a significantly better chance of retaining their contingent talent.”

The research also suggested that companies that are unwilling to engage genuinely self-employed contractors on an “outside IR35” basis can expect to pay a premium for the key skills they require.  69 per cent of contractors said that they would increase their rates for “inside IR35” contracts, with 16 per cent already having successfully negotiated a higher rate.

“Ultimately, many clients adopting a knee-jerk reaction look likely to prove the architect of their own downfall,” said Chaplin.  “Most contractors won’t simply accept a rate reduction to pay the firm’s new tax bill where they should genuinely be assessed as ‘outside IR35’.  Firms who have succumbed to overzealous scaremongering are likely to have a diminished long-term bottom line and be less competitive.”

For companies that do attempt IR35 status assessments, questions still remain.  Only 46 per cent of respondents who had been assessed were invited to provide input regarding their employment status and 47 per cent had not been provided with a status determination statement by their client (this will become a legal requirement post-April).

52 per cent of assessments were carried out using CEST, which 75 per cent of those polled believe is inaccurate.  In fact, only 11 per cent of respondents said that they would accept an “inside IR35” CEST determination, 41 per cent said they would challenge an “inside IR35” CEST result and 64 per cent said they would always seek an independent assessment from an expert.  Only 3 per cent of contractors trust CEST to accurately reflect employment status case law.

“This is bad news for clients who intend to use CEST at the eleventh hour to assess their contractors,” said Chaplin.  “These firms can expect a considerable backlash, numerous status disputes and terminated engagements.”

The research makes clear that companies that engage contractors need to exercise caution in respect of their Off-Payroll compliance obligations or risk losing the best talent, IR35 Shield warned.  Only 32 per cent of contractors are confident that they will remain with their current client once the new rules come into force in April.

57 per cent of respondents expect that roughly half or more of their client’s freelance workforce will leave because of the Off-Payroll rules, and 39 per cent anticipate Off-Payroll to cause short-term damage to their client’s business.  Only 6 per cent of those polled expect Off-Payroll to have zero impact on their client’s ability to retain contractors.

“For hiring firms and agencies, the message is clear,” noted Chaplin.  “Those who fail to comply will be at the back of the queue when contractors decide on their next contract, leading to recruitment struggles and damage to projects.  Firms need to realise that blanket bans on limited companies are an expensive way of hiring lesser talent, whilst handing a competitive edge to their competition.”

Chaplin continued: “The blanket ban decision by some firms is quite absurd when you consider that the probability of HMRC managing to overturn a status determination at a tax tribunal is minuscule.  With the correct contracts in place and every party to the supply chain providing contrary evidence to their claim, it’s difficult to see how a judge would rule in HMRC’s favour.

“Once some of these firms realise that the scaremongering was without foundation and that they’ve instead engaged in an act of self-harm, they will start to question their position.  Within two years, I expect things will be back to a normal, with genuine contractors able to work effectively and without fear.”

13th January 2021.