As companies up and down the country prepare for the forthcoming legislative changes to the off payroll working rules (IR35) on 6th April 2020, a golden opportunity is emerging for some to attract the best talent from the biggest, most heavily regulated and conservative organisations.
On 12th February 2020, sign-waving contractors and freelancers accumulated outside the Houses of Parliament in London’s Westminster to protest against the controversial IR35 tax reforms. According to one recent study, more than half of the contractors and consultants working for private companies plan to leave their clients rather than continuing with a determination that they are caught by IR35.
The new obligations imposed on end clients by the IR35 changes have been widely reported but basically amount to:
- having to issue a reasoned status determination for each contractor in their workforce who is operating via a personal service company
- having to keep records of such determinations and have processes in place to deal with any disagreements that arise from them
- where it is determined that IR35 applies, the fee payer must deduct and pay tax and NICs to HMRC as if the contractor were an employee. Employee contributions will also apply for the individual
For arrangements that are assessed by the client as being caught by IR35 which were not previously deemed as so by the PSC, this effectively means a hit to the pockets of either the client, the contractor, or the agency (or a combination of the three) of about 22% of the contractor’s fees.
The reaction of the largest institutions to the new regime, who are particularly risk averse to the potential liabilities and reputational damage of getting it wrong, has been to simply move all PSC contractors to a PAYE model, resulting in a substantial decrease in the take home pay to those individuals. The individuals affected are being taxed as if they are employees whilst receiving none of the benefits of being employees.
Whilst the market is adjusting and there are not many other roles to move to which fall outside of IR35, this has not yet had much impact on the client organisations concerned. However, that is likely to change soon.
Organisations who are either not caught by the IR35 rule changes, or who are strategic in how they structure their resourcing policy, are well placed to capitalise on the opportunity to attract the best contractor talent.
Are you caught?
Smaller companies will not be caught by the rule changes, such that responsibility for assessing whether the arrangement is caught by IR35 still sits with the PSC. Their ability to resource outside of IR35 is therefore greater. But this de minimis threshold only benefits small private companies that do not meet 2 or more of the following conditions:
- annual turnover of more than £10.2 million
- balance sheet total of more than £5.1 million
- more than 50 employees
Note: there are also rules covering connected and associated companies. If the parent of a group is medium or large, their subsidiaries will also be caught by the new rules.
What is more interesting is the opportunity for organisations of any size to structure at least some of their resourcing needs in such a way that they do fall outside of IR35, and are advertised as such. This is not tax evasion; it is just taking steps to ensure that what can and should fall outside of IR35, does so. We are seeing clients who have a first mover advantage on this approach attract the best contractor talent in the market.
This structuring can be achieved by using a number of organisational and contractual levers, such as:
- resourcing on a project basis, where the contractor has autonomy to deliver a specific project rather than simply being another member of a team of employees
- giving the contractors autonomy (both contractually and in practice) over how the work is to be performed, where and when
- where practicable, giving the PSC a right of substitution of the individual doing the work (although the absence of this rights is not in itself fatal, contrary to what has been widely reported)
- giving the contractor financial risk, for example in relation to their own insurance and tools
- making it clear that the role is outside IR35, both in the manner in which it is advertised and in how the person is treated within the business: labelling them as an external contractor
- making sure there is no obligation on the client to offer, or for the contractor to accept, work outside of the scope of the specific project
We are coming across several clients who are seeking resource roles that could easily be structured to fall outside of IR35.
Contax Law is an agency specialising in the provision of flexible legal resources, including contract workers. If you wish to discuss any of the issues raised in the article, please get in touch.
Client Relationship Director