Written by Rich Copeland, Founder and Solutions Director at Certes Turnkey Solutions
IR35 changes already implemented in the Public Sector back in April 2017 are due to be implemented in the private sector from April 2020 – this will be the most significant disruptor to ‘contracting’ for a generation and the potential impact and costs for business is huge, inevitably there will be winners and losers.
Certes experience of working with Public Sector organisations and Ltd Company contractors (PSCs) to successfully manage changes to working practices post IR35 positions us to help Private Sector businesses to:
- Understand that significant disruption lies ahead between now and April 2020
- What the key issues and challenges will be
- Guide and support organisations to plan for the change to de-risk the impact to Business, Projects and ultimately profits… Yes, it could be that serious!
Before going any further I think it’s worth taking a look back at what’s happened and what’s driving the changes.
So, what is IR35?
IR35 legislation was introduced in 2000 and was designed to tackle tax avoidance from what HMRC believed to be ‘disguised employment’; where self-employed ‘contractors’ set up a Limited Company (PSC) to provide their ‘services’ but worked in a similar way to full-time employees, just in a more tax efficient way. In general, there are 3 commonly accepted principles that inform whether a contract is IR35 compliant:
- Supervision, Direction, Control – this relates to how much say a client has over how a contractor completes the work. For example, working at certain times, this implies employment
- Substitution – could you bring someone else in to complete the contract, or do you need to do the work yourself? If you can’t send someone else, you’re likely to be within IR35
- Mutuality of Obligation (MOO) – is there an obligation on the employer’s end to offer work, and do you have to accept it? This is called mutuality of obligation, and if it exists, the contract will fall within IR35
There are of course many other factors, most typically non-contractual, which also influence IR35, including; equipment, financial risk, payment schedules and exclusivity. These factors will be considered by HMRC during an investigation as they review the ‘working practices’ associated with any engagement.
What happened between 2000 and the Public Sector changes in 2017?
Well, contracting became VERY popular across all industries and sectors, from Professional Services (e.g. IT, Legal) through to Admin and Clerical (e.g. Data Input) and even hotel chamber maids!
The growth of contractors’ operation via PSCs was driven by multiple factors, including, but not limited to:
- The convenience, flexibility and savings businesses can make by not employing someone directly
- The growth of specialist sectors such as IT and the demand for niche skills
- Legislation including AWR came along in October 2011, giving temporary workers the same basic T&C’s as permanent staff (holiday pay etc)
- People wanting a more flexible work life balance and realising that this dream could be achievable for them by opting out of corporate life… Seeing others make the change successfully and enjoy the financial freedom and lifestyle encouraged others to make the change
- The government realised just how big the increase in Personal Service Companies (PSC) had been which are simply Ltd Companies owned and controlled by an individual who are commonly referred to as ‘contractors’
Between 2000 – 2017, contractors themselves were responsible for evaluating and determining their IR35 status, and so it’s no big surprise that the overwhelming majority came to the conclusion that they were outside of IR35 regulations – we all know Turkeys don’t vote for Christmas!
Market dynamics were working (for government, business and contractors), so why make changes?
In a word – MONEY – the government (led by HMRC) believes they are missing out on £££ millions/billions in lost tax receipts. I’ll leave it to financial experts to debate whether this is the case or not, but either way, the change is coming.
What are the changes?
It’s important to be clear that IR35 legislation hasn’t changed. The key ‘game changer’ is the ‘engager’ (business) has the responsibility for ‘determining’ whether IR35 rules apply to the ‘individual’s services’ rather than the PSC (contractor).
Okay, this sounds simple, so what’s the fuss all about then?
Simply, it’s about Risks and Financial Penalties and the likelihood of getting caught by HMRC.
Historically there’s been hundreds of thousands of PSCs for HMRC to identify and investigate, so by changing the onus to the ‘engager’ to make the decision, they’re able considerably ‘close the net’, give themselves a better chance of identifying non-compliance and increase the taxman’s returns by going after big business.
The penalties for non-compliance are significant – the “engager” will be liable to pay taxes and NICs to HMRC, plus any penalties. The risks and penalties are why many Public Sector organisations took a ‘blanket approach’ to deem their contractors inside of IR35 – in a scenario where you have 50+ contractors working for you, the consequences of getting IR35 decisions wrong can quickly run into £millions. Plus there’s also the matter of a reputational risk and a PR disaster – being caught and finding your businesses name in the media for all the wrong reasons!
What are the options for private sector businesses?
- Carry on as you are and do nothing – highly risky and likely to cause significant disruption later on
- Stop using contractors by April 2020 – likely to have massive implications for any medium/large business and probably not practical if you want to stay in business and survive
- Evaluate how you can manage the risks and disruption and make the necessary changes to minimise costs and continue focusing on delivering your core priorities
What are the challenges I need to consider?
Most businesses are likely to take option 3 and some have already started to consider and work on how they are going to manage the change. For those who have not considered this, now is the time to start.
There’s a huge amount of ‘noise’ on social media about the problem, but not too much practical advice, so it’s time to share some our experience of the problems and challenges faced by the Public Sector:
- Compliance and Audit Risk
- Implementing a documented process for evaluating IR35 status
- Administrative cost of IR35 assessments
- Managing the disruption prior to April 2020
- Financial costs
- Increasing costs to retaining existing contractors
- Calculating and understanding the cost implications of wrong decisions
- Cost implications of projects being delayed by IR35
- Supply chain compliance
- Do existing suppliers have robust processes for managing IR35?
- Contractors are moving from Ltd Company (PSC) to Management (umbrella) Companies. Are these schemes compliant?
- Contract Management and working-practices
- Do you hire and manage contractors in the same way as permanent staff?
- Do contractors work via Job Description just like staff?
- Do you pay contractors for ‘being at work’ via a timesheet?
- Mobility of contractors is significantly impacted by inside IR35 status as they lose the ability to claim and offset expenses
The impact of these challenges has been considerable for some Public Sector organisations:
- Increasing costs of contractor workforce
- Difficulties engaging the key capabilities, skills and experience that are vital for projects
- Losing existing key contractors and their knowledge base
- Delays to projects and in some extreme cases, projects being stopped or failing completely
- Mounting reliance on big consultancy firms – increasing costs further and losing control of critical projects
Ultimately, the Public Sector lost skills and expertise to the Private Sector post the changes back in 2017, but they didn’t have the risk of losing competitive advantage – this is something that will happen in the private sector if businesses don’t prepare appropriately and make the required changes early enough to protect themselves.
How can Certes help you to overcome the IR35 problem?
Our IR35 experience in the Public Sector means we’ve seen the good, the bad and the ugly! We’ve got Case Study examples which can inform, guide and provide lessons learned to help you approach the challenges ahead.
Most importantly we listened (really listened), using our experience and relationships to design, develop and test our innovative Turnkey Solution, proven to be IR35 compliant and used by a number of Public Sector organisations.
To find out more about how we can help you understand IR35 challenges, plan to manage the changes and implement a solution to the problem, please contact me at:
email@example.com or on 07766 740311.