Dave Chaplin reflects on Off-Payroll one year on and speculates on the legislation and its impact on the future for hirers and contractors.
April 6th marked the first anniversary of the Off-Payroll legislation, the reforms that were rolled out in the private sector ushering in changes that pushed the onus of determining whether limited company contractors should be taxed as ‘inside IR35’ or ‘outside IR35’ onto the medium and large private sector firms that hire them.
Many businesses were unprepared and took the path of least resistance and effectively pressed the contractor reset button – this meant temporarily banning the use of limited company contractors. That move has significantly impacted the firms that rely on flexible, professional talent and their projects and the contracting workforce itself.
The sector suffered. Contractors left their roles in droves – some went abroad, while others secured work through umbrella firms. That move, in turn, saw a proliferation in the number of disguised remuneration schemes being set up to dupe unwitting contractors, many of whom had never worked for an umbrella firm. For some, this meant being forced into dodgy schemes that would only end in more victims being pursued by HMRC for unpaid taxes.
But the dust is settling, and firms that adopt best practices can confidently navigate the legislation and continue to hire the talent they need.
Education / Collaboration / Fairness
Firms that have adopted a fair and transparent process are more likely to attract contractors than those that have blanket banned them. Firms are learning that a long term choice to refuse limited company contractors and move wholesale to only hiring “on-payroll” comes at a cost.
Despite the original IR35 legislation being around for over two decades, many supply chains were still reliant on contracts that supplied people and not services. The core of any status assessment is whether it is one “of service” (deemed employment) or “for services” (not deemed employment).
And whilst many contractors sought to secure contractual documentation to support their “outside IR35” status, for years, the typical response from firms was “no” because they would not entertain redrafting contracts on a case by case basis.
To compliantly hire “outside IR35”, those types of boilerplate contracts must be replaced with terms that accurately reflect the engagements. When it comes to IR35 disputes, the contract is still king.
We saw risky implementations being adopted with limited time to put in place fully robust IR35 regimes and firms were attracted to “easy solutions” offered by pop-up experts. And whilst easy fixes are enticing, in the complex world of IR35, the amount of risk accrued is likely to be indirectly proportional to the extra burden taken on to be compliant.
Take a “role-based assessment”, where the hirer bundles together some twenty IT contractors on one-year contracts and issues them all with the same assessment – but then does nothing for the entire contract duration. The risk associated with this approach is threefold:
- Firstly, without rechecking the status monthly throughout the year, if the working arrangements and IR35 status changed in month one, then 11 months of tax risk build-ups unnoticed.
- Secondly, if HMRC investigates, all twenty contractors appear to have precisely the same fact pattern and are grouped into one enquiry.
- Thirdly, even if the engagement remains outside IR35, without any gathering of evidence to shore up the original determination, four years later, if the client faces a tax tribunal trying to discharge their burden of proof, it isn’t easy without any evidence.
The answer is to adopt case-by-case assessments, monitor them monthly, identify any status changes, and gather evidence. Monitoring ensures each contractor has a unique fact pattern, any attempt at binding groups of contractors can be challenged, and the evidence can prove the status was correct. This requires automation.
The current case law on employment status, upon which IR35 is based, is changing, with many appeals going through the tax tribunals. We know from HMRC themselves that it takes three-five years to train inspectors on status matters.
Exercising reasonable care when conducting status determinations might involve a first step to acknowledging that it is best left to specialists experts who have proven experience in this field.
Whilst the case law is changing; it will settle down in the next one-two years and provide the certainty that the whole market needs.
And the future?
After a considerable effort by HMRC to get the IR35 reforms in place, don’t expect them to be repealed. The final piece of the jigsaw will be for HMRC to convince the Government to remove the exemption for small companies because they don’t have to operate within these new rules.
Meanwhile, we are likely to see less reliance on HMRC’s CEST tool because it is too simple, overly risk-averse, and effectively restricts a firm’s access to talent. It neither delivers the entire lifecycle of IR35 compliance needed for complete protection.
HMRC has already begun investigating firms, but the approach appears to encourage firms to get things right rather than leaping to litigation. We are unlikely to see any tax tribunals based on the new rules for four-five years but don’t be complacent.
Firms can continue to access talent, provided they take a robust compliance-led approach to engage with contractors. The future should be bright for the sector and, in turn, the economy.
Dave Chaplin is CEO of IR35 compliance solution IR35 Shield and author of IR35 & Off-Payroll Explained