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IR35 Reform – Mistakes to Avoid

Mistakes to avoid when preparing for IR35 reform

A sea change in the contracting world will hit the private sector next April. Under new rules for administering the IR35 legislation, medium and large businesses in the private sector must take responsibility for setting the tax status of contractors. With agencies set to carry the liability when operating as the fee-payer in the engagement, recruiters are very much involved too.

Said quickly, IR35 reform doesn’t sound too radical, but given the difficulties the public sector faced when changes were introduced in 2017, there are a number of lessons that must be learned.

Don’t delay preparations

Don’t hope for a U-turn from HMRC. We can debate as much as we like whether these IR35 changes are the right course of action to stop what the Government sees as widespread non-compliance, but by the looks of things, it’s too late in the game. It seems very unlikely that HMRC will change its mind. And so like it or not, private sector businesses and agencies must start putting the processes – and the right mindset – in place to help them successfully manage changes.

Avoid blanket IR35 determinations

It’s important the private sector doesn’t make blanket IR35 decisions, which have been used too often in the public sector’s approach to reform.

Accurate IR35 decisions are typically made on a case-by-case basis. Each contractor should be individually assessed, because few contracts, in reality, are likely to be exactly the same.

HMRC itself advises against blanket decisions and yet it became widespread in the public sector. Not having the skills or the time to put into these assessments is likely to come back to haunt the engager. And from next April it will often be their liability if their decisions – if challenged – are proved wrong. Real care needs to be taken with IR35 assessments. There is, after all, a lot at stake.

Do not give contractors ultimatums

For agencies and engagers to offer contractors no option but to work inside IR35, through an umbrella, on payroll or not at all is a short-sighted move.

Independent professionals will simply look elsewhere, opting to work on projects where they can have their IR35 status assessed fairly. Needless to say, the companies that have come to rely on a highly skilled flexible workforce will lose out.

There are worrying signs that this trend is already underway. HSBC has reportedly told contractors working through personal service companies that after one further contract extension they will have to decide whether to become employees or have their contract terminated.

Don’t rely on CEST

It’s all too clear that despite promises made by HMRC to upgrade CEST in time for the introduction of private sector reform, not enough has been done yet. The software was never thought to be up to scratch for the public sector, and the improvements recommended by the HM Treasury’s Office of Tax Simplification last week do not solve these issues.

Recruitment agencies and private sector firms should remember that its use isn’t mandatory – independent IR35 assessments are allowed.

In fact, don’t rely wholly on HMRC

It must also be said that relying on HMRC’s guidance and support – beyond CEST – is also risky. The various disputes settled in court against HMRC have made clear there’s a question mark over whether the organisation itself fully understands the complexities of the IR35 legislation.

The attitude at HMRC seems to be that the recent substantial rise in tax revenues provides evidence of success with IR35 reform in the public sector. With this in mind, there’s little to suggest that HMRC will do much, if anything, differently in the private sector.

Don’t leave contractors in the dark

Expectation management would be a good thing right now. Agencies and medium and large private sector businesses should open up a dialogue with contractors. After the chaos in the public sector, these workers need some kind of reassurance.

The more contractors know about the process and the more involved they are with the people who will set their IR35 status, the better. Understandably, they want to know that the agencies and businesses they work with are on the ball and that preparations are being made to gain the required skills.

It’s time to put their minds at rest. It’s time to prepare for IR35 reform.

Learn more about QAccounting’s range of IR35 services here.

By Troy Stevens


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3 thoughts on “IR35 Reform – Mistakes to Avoid”

  1. Mike

    Its going to be a bigger disaster than when we where pulled in to the illigal EU dictatorship. Contractors are going to look further afield I have already been getting contracts from America, Norway, and Australia. Its alot of messing round but what we will see is a blanket ir35 opt in with Recruitment agencies automatically saying every contract falls in ir35. Nuclear and defence will probably suffer the most as alot of their standards need someone to work from their office, using their equipment, under instruction etc. So all of which under these stupid rules says you are an employee, when you are not… the rates will not go up to compensate the thousands that you will know have taken off you in tax and ni and staying away from home on contract will become a completely oht of the question as accommodation and meals expenses will not be able to be claimed against your oporation tax that you used to pay. In the end the goverment will looses hundreds of millions in taxes as contractors will either be forced to look else where or forced to try and apply for permanent staff jobs of which there will not be enough, forcing wages down (supply and demand) so all you permanent staff out there that have moaned for years just you wait when your wages become even more stagnant and your employer can just sack you without fear of being able to hire a ex qualified contractor who’s been forced to take a perm job…

  2. James

    The previous comment made validate points, I think IR35 is both colossally stupid and a modern day witch hunt. But your opening statement didn’t seem in keeping with your otherwise insightful understanding of the situation. I think shallow meaningless soundbites might sway the public to thinking the government and HMRC are solving a valid problem. IR35 has been a mistake from start to finish, demostrating unwavering incompetence and lack of knowledge, but what worries me is, what else are they messing up? Is this uncharacteristically stupid or the norm?

  3. Isabel

    I have already come across a couple of contracts from recruiters where they add a clause making contractors liable for their taxes in case of an investigation. Has anyone had the same experience?

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