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‘Hasty’ IR35 decisions have ‘disastrous’ consequences

With reform imminent, experts urge firms not to make “hasty” IR35 decisions 

A quarter of contractors say their clients have already told them they will determine all engagements inside IR35, new research by self-employment trade body, IPSE, has found.

The survey, which polled more than 1,500 freelancers, also showed that over a fifth (21%) reported their client would only engage with them via an umbrella company, while 17 per cent said they still do not know how their engager will approach IR35 decisions.

A further eight per cent reported that their client will no longer work with contractors in any capacity due to the controversial changes. 

IR35 reform in the private sector will be introduced on 6 April. The changes will shift the burden of determining employment status for tax purposes from the contractor to the end client (medium to large businesses). The only instance in which a contractor will continue to set their IR35 status is when their client qualifies as a small business.

IR35 cited as biggest concern for contractors 

The study found that the looming changes to IR35 are a significant concern to more than two-thirds (70%) of freelancers. And for those working via a limited company, who are more likely to be affected, this figure increases to 88 per cent.

In IPSE’s Freelancer Confidence Index for the last quarter of 2020, contractors cited government tax policy – like IR35 – as a key factor having a negative impact on their business over the pandemic.

This echoes HMRC’s findings in its report by the Behaviour, Insight and Research team, which revealed that freelancers wanted more information on how IR35 reform will affect their future tax returns.

Andy Chamberlain, Director of Policy at IPSE, said the research highlights the “disastrous impact” the changes could have not just on freelancers and contractors, but on hiring businesses too. 

Half of contractors plan to quit

According to IPSE’s research, because of risk-averse IR35 decisions made by businesses, half of freelancers (50%) said they plan to stop working for themselves in the UK. However, 57 per cent of these also reported that they would continue if they found contracts deemed outside IR35.

Nearly a quarter (24%) said they plan to seek contracts abroad, 12 per cent said they would stop working in general and 17 per cent will look for a PAYE job.

Chamberlain said: “Our research shows that the added risk for clients has led to deeply concerning responses: almost a quarter of contractors said their clients were making blanket inside-IR35 assessments, while a fifth are only working with contractors engaged through umbrella companies and nearly one in ten are planning to stop using contractors altogether.

Contractors allow firms to navigate periods of ‘instability’

“We believe these are hasty decisions that will have long-term negative consequences not only for contractors, but for the long-term performance of these client businesses themselves.

“Contractors bring vital flexible expertise to businesses, which allows them to navigate periods of instability or change – periods exactly like the UK’s opening up from COVID-19 restrictions. We urge clients to continue engaging contractors and put in the time to make individual IR35 assessments.”

In light of its recent survey, IPSE has put forward policy recommendations which include an alternative arrangement to IR35 – the freelancer limited company concept where end-clients pay an engager’s National Insurance.

It also suggested the government should implement the recommendations from the Taylor review to provide clarity on employment and tax status.

By Contractor Weekly

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26 thoughts on “‘Hasty’ IR35 decisions have ‘disastrous’ consequences”

  1. The T

    Not sure who IPSE have consulted with but frankly the message should be clear and unequivocal.

    IR35 is a “Smoking Ruin”, has not been properly trialled in the Public Sector, fails to appreciate the inherent risks of contracting, and is wholly illogical. IR35 should be abolished altogether.

    If the Treasury was concerned about Tax then simply calibrate the Tax legislation slightly for PSC’S as advised repeatedly. For example, all they had to do was impose increased Dividend Taxes on PSC’S, where little or no Employee’s or Employer’s NI was paid.

    There is no other situation in Corporate Law whereby the Engaging Company is obliged to underwrite the Tax Affairs of the Engaged Company.

    None of the commentators or experts have addressed this issue. Instead they have manufactured “Umbrella Companies” as the solution.

    Why is it deemed OK under IR35 to contract via an Umbrella Company but not OK to contract via a Personal Service Company. The whole concept is floored, and will be found in due course to be in contravention of Corporate Law. Slater & Gordon etc.

    All this will achieve will be to significantly discourage Employers from using Contractors in the traditional way. It will legitimise and encourage Fixed Term Contracts, which pretend that a Contractor is an Employee, although unlike a genuine Employee, there is no pre supposition of Perpetual Work, no appreciation of the geographical distances, and no investment in Continuous Professional Development etc.

    Then once the 6 months are over the Contractor has no new contract and might be out of work for several months.

    Currently the Contractor via a PSC can pay a modest salary during the good times, in the event that the PSC can continue paying the modest salary during the bad times. Any surplus at the year end is taxed via Corporation Tax.

    Under Umbrella Companies and FTC’s super tax is paid immediately via Income Tax but once the contract ends there will be vulnerabilities that the Umbrella Company won’t be concerned with nor will the Engaging Company.

    For example with Covid the PSC was able to apply for Furlough, and there was no obligation for an Umbrella Company to do so, and certainly no obligation for the Engaging Company offering an FTC.

    • Gary Andrews

      The Treasury is making all forms of contracting paradoxical or arguably illegal with IR35 and subsequently choosing which politically uncooperative taxpayers to prosecute.

      In a wider criminal context “being annoying” will soon be punishable by up to 10 years in prison. The home office will no doubt use this to punish politically uncooperative citizens of their choosing.

      It’s a mark of authoritarian governments to make laws so vague anyone could be considered a transgressor. It seems a party donation or high profile, pro-government social media timeline is required to keep you out of the dock currently.
      The ultimate nudge unit.

    • Abertawe

      The “trial” of IR35 in public sector areas hasn’t been a real trial at all. In reality, it just allowed external consultancies to grab a bigger slice of the pie, and those consultancies just employed the contractors themselves outside of IR35. So the whole issue has been rather masked and this new blanket interpretation is just going to be carnage. There’s already threats of legal action over Employer’s NI, and I can foresee scope for argument over the “real” end client in many scenarios.

    • Steve

      Interesting thoughts.. I’m stuggling to get permanent as I’m over 50. Companies don’t want the older generation only young “cheap” people.

      Have you concidered and you must have seen this yourself. Ex-contractors have far greater overall experience than “straight from uni” employees and will come into the company and be promoted quicker.

      Plus employee wages will now, due to the lack of contractor competition reduce. My sister a senior, highly skilled (2 first, 1 second class degree’s) works in an environment where contractors are not used at all.. She earns a whopping £60k a year, pays for parking twon centre, uses her own car for business.. She’s practically at breaking point, mentally.. and the system is setup so that there is no where to go.. i.e. each county has the same structure (obviously this is government employment) but I see this tailoring itself to private sector.

  2. Bozo ate all the pies

    We have a situation where accountants, tax lawyers, politicians, judges and HMRC can’t legally define what the IR35 rules are.

    So instead of passing clear legislation, on April 6th the government will be passing the buck and making clients legally responsible. Responsible for whatever unknown penalties are deemed appropriate when the IR35 enigma is finally decoded by the courts in future decades.

    No client wants that kind of liability. Most UK freelancers have already lost their contracts. Remaining clients are only engaging expensive foreign outsourcers where the IR35 rules and UK taxation don’t apply.

  3. The T

    The irritation is the premise that IR35 has been deployed successfully in the Public Sector. Name 1 just 1 Public Sector organisation that HMRC has prosecuted for contravening IR35.

    Even if they did they would be robbing Peter to pay Paul.

    Instead they have been rifling their way through the TV Times targeting Eamonn Holmes & Kaye Adams. Fortunately the Supreme Court saw sense in the Kaye Adams case.

    The legal precedent will apply in future IR35 cases as most Contractors will easily be able to prove that Revenue from the existing Client will only account for 30% to 50% of their total Revenue over the previous 2 Years or 3 Years.

    If a Contractor has been exclusively with the same Client for 4 years or more then risks will start to arise, and even then the complexity of the projects or project will need to be taken into account.

    However the damage has already been done as pointed out and Client”s just won’t take the open ended risk of IR35 and as pointed out simply outsource offshore.

    The other unintended consequence will be that Client”s will soon develop a taste for FTC’s and many bright spark Finance Directors will start saying ‘Why take anyone on with a Conventional Permanent Contract when we can employ everyone on a FTC Contract’.

    Why would the Chancellor of the Exchequer actively encourage Offshoring? It makes no sense unless of course he has a vested interest.

    IR35 ranks right up there with the Poll Tax as one of those monumental political mistakes, but at least they had the sense to eventually ditch the Poll Tax, but they still tried it.

    • XY

      “Why would the Chancellor of the Exchequer actively encourage Offshoring? It makes no sense unless of course he has a vested interest.”

      Did you know that his father in law is co-founder of Infosys (2nd largest Indian IT consultancy)?

      Not mentioned in the register of interests (as if that would change anything).

  4. Where are the PSC Contracts?

    1/4 of companies telling their contractors their contracts will be in IR35? Wow! What industry is that in, because in fin services, and other industries I work in, I don’t see too many that allow PSC/LTD company contractors – in fact I have seen zilch!

    I ditched contracting. For the c. 25% more gross than equivalent permanent, I still have to do all the accounting, my own pension (that is 10%, thanks), medical, etc. In addition, I have to foot the bill for training, provide my own support services, and manage myself.

    I am now permanent ad guess what? All that is taken care for me. And if I do a rubbish job, they have to manage me out.. no simple execution of notice period. And, of course, when they over-hire, they will have to pay me a redundancy as well.. .Why on earth would anyone contract?

    I have seen the market has taken advantage of this; rates are lower and they are keeping people on FTCs, but they don’t escape all of the above. And since rates are lower, we aren’t paying accountants, etc, and taking VAT, etc, they probably will find their net tax take is less, too. And as more people go perm, there will be fewer recruitment consultants to make a profit, because there will be smaller movement in the market..

    Shot themselves and everyone else in the goot at the same time.

  5. Steve

    Here’s my experience.. Was working via limited company with hotel/travel bills £2.5k a month for two years. Now working from home so luckily saving £2.5k which is nice but have had to go onto umbrella as main agent wouldn’t extend/employ ltd. So usually I only pay myself upto the 40% tax bracket now as it was already setup for the year I was potentially paying 40% on all of 3 months extension… Went for salary sacrifice so 80% into my pension 20% (due to minimum wage/holiday regs) paid 40%. I AM LOSING £1000’s PER MONTH!!!! If it was still a work in office it really would be viable only forthe fact I have saved the £2.5k travel/hotel is the only reason I’m still working for this company. When you look at it ike this and I live in an area where there arn’t contract employers.. I would be better off ditching the 10-12 hour £80k contract and doing a 8 hour local driving job or something non-technical.. Lucky for me I only have 2-3 years left before i retire but this IR35 situation is utterly crazy.

  6. Geoff

    This should not be looked at in isolation. MTD is another barrier to entry cunningly devised by HMRC to make self employment as difficult and unattractive as possible. There has clearly been a concerted effort to abolish contracting.

    • Steve

      I think you’ve clearly hit the nail on the head “There has clearly been a concerted effort to abolish contracting” I’m old enough to remember councils and government departments having to pay IT staff highe than managers in other departments because they couldn’t get the staff. That was an extrememly bitter pill to swallow for the government workers that spent 10’s of years arse licking to move to the next pay bracket in a communist style structure.. Now these people have crawled into high ranks they are bitter enjoying the IR35 virus thats being deployed.. Well thats my theory anyway :-)…

      • Gary Andrews

        “The IR35 virus” – exactly that. Nothing about the regulations are constructive tax laws.
        It’s only purpose is to destroy.

  7. steve

    Actually I have to say I feel sorry for the Accountants.. We’ve just let our go.. Got a email back which had a slight disatisfied twist to it but not unexpected, thats £4k a year less from us and I suspect thats pocket change compared to the overall loss they will make after April. No new porsches, AM’s soon.

  8. John

    I was recently offered a contract role with a major bank that had to be done through an umbrella. First time I considered this option, but was shocked to see that I would lose 50% of earnings. I just said no and walked away – all the work, stress and hassle wasn’t worth the low net rate.

  9. XY

    If only we could get a Conservative government…

  10. Jimmu

    Lots of contractors in automotive cad design for jaguar Land rover aston martin Williams Nissan etc were all on long term..10 years plus…contracts.
    It’s because of this wide spread abuse that ir35 has been imposed.

    • Gary Andrews

      Wrong – IR35 has been in effect for years, if at these firms, there are disguised employees operating as contractors then HMRC should take action against them with existing legislation.

      Conversely if they are real contractors abiding by the law then that’s fine and legal. What this legislation does is effectively ban all contractors by deterring those who would engage any of them.

      Tradesmen often avoid tax, should we ban them all too? Just in case some of them are evading? How many other industries could we also destroy with that logic?

      • Mitch

        Good idea!
        How about a new law where you forfeit your house if any tradesmen who have worked on it are found not to have paid the correct taxes.

        • Gary Andrews

          You jest but this is EXACTLY what the IR35 liability change means to medium and large companies, and without the small business exemption your parody would approximate reality. The reason for the sudden death of the flexible workforce.

          Covid is temporary, Brexit stops us working elsewhere, government aims to enslave us. Oh the freedom, control and sovereignty.

    • Milleniumaire

      Be careful Jimmu, you are applying the same incorrect rules that HMRC inspectors ignorantly apply to contracts, despite their training.

      The length of time a service company is engaged by a client isn’t necessary an indication that they are caught by IR35.

      Just have a look at the Hawksbee case – 18 years at Talksport. It is MOO that is important, not time!

  11. Mark

    ‘Hasty’ IR35 decisions – As tax legislation, IR35 was implemented properly in the Finance Act for April 2000 – I’m not sure 20 years can be considered hasty!

    Did nobody mention it before??

    • Johnny

      It’s Rishi Sunak’s change to make clients liable for treasury’s still ambiguous IR35 law that has ended contractor engagement now.
      It comes into effect on April 6th, clients no longer engage contractors for THIS reason.

  12. Shot in the Foot

    Business will be paralysed with this change. Those operating outside of the rules (legitimately) are also penalised as hiring companies are not taking the risk. As also a hirer we have put roles on hold for UK based resources.

    This really is a bad move for the UK, where ultimately the resultant tax take will be lower as projects are moved.

  13. The T

    Infosys- Recently did an implementation involving a Mumbai subsidiary. One of the senior operatives was thrilled to receive a significant raise to 800,000 Rupees per Year. That’s £8500 per annum; as they say “You do the Math” !!!

  14. The T

    India is one of the poorest countries in the world, so when some “Snake Oil Merchant’ offers salaries of 5 – 8 Lakhs per annum there are no shortage of takers. If the “Snake Oil Merchant” is being paid in Sterling so much the better, and let Universal Credit take care of the losers.

    Offshoring is a race to the bottom and maybe we need to start seeing beyond this Winchester/Stanford’ BS, and stop drinking the Kool Aid.

    • Jacob

      There is a heap of issues with offshoring, like taking heroin for a headache.
      I’ve worked with Indian and British outsourcing teams for 15 years and I’ve noticed the reality isn’t well represented.
      Firstly, it’s always much more expensive for the client company. The worker is badly paid, the gap is closing but workers are not the major expense.
      Most of the paid money is appropriated by the complicated chain of command, agencies and kickbacks needed to run these operations.
      The offshore outsourced contracts yield no tax for the British government with the exception of the few individuals who travel onshore to Britain under a work permit indentured by their sponsor. Even then they only yield PAYE on their small salaries with the majority payment going to offshore shareholders.
      Skill levels vary with some very talented and driven individuals, the more expensive end of the market and will typically cost a client 2-3 times the gross rate of a British Ltd contractor.
      India has a steady stream of technical graduates and for most jobs these are the sort of inexperienced staff that get supplied in bulk. There is a prevailing attitude on both continents that if there’s more work simply supply more people to get it done quicker.
      The outsourcing companies have a business model to gradually take over a client’s technical infrastructure to an extent where they cannot be replaced. This ensures more staffing contracts with the ultimate goal to control the decision-making and hiring positions for obvious reasons.
      The quality of work is secondary to the aim of completing a task quickly. Often a tangled, badly planned conundrum of a system that ‘only we can maintain’ is part of the ongoing business plan.
      UK corporate managers think short term targets = bonuses. They like to outsource the whole budget, risk and responsibility to a third party and just turn up for the launch party. After all it’s not their money and will often get allocated a separate budget just for that project.
      A companies data privacy and intellectual property will always be compromised.

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