Podcast: Why do clients have PSC bans/umbrella only policies?

Our latest Proudly Offpayroll podcast lifts the bonnet on what’s happening with regards to PSC bans and why.

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You can find all episodes of the Proudly Off Payroll Podcast here.

First thing to say is that there is no way you can tackle a beast of a topic like this without looking at it from someone else’s point of view.

So, the first set of shoes we’ll put on are those of HMRC. Looking back, they’ve taken the approach to get contractors to identify for themselves if they are a disguised employee. But it’s not worked out for them as they would have hoped, and it’s extremely difficult and costly to send an army of enforcers to qualify every self-employed professional.

It’s therefore easier to get someone else to do it for them. And who better than corporates. When you boil everything down that’s ultimately the thrust of the offpayroll legislation.

It’s why we have seen the details of 225,000 AirBnB hosts handed over to HMRC in a bid to identify those not declaring earnings on their tax return. eBay is another good example. HMRC is also embarking on a capital gains tax clawback via the likes of Zoopla. Using corporates in this way is a fast track to finding evaders.

So, let’s put on the next pair of shoes, those of corporates. They are bound by the Criminal Finances Act of 2107, which states it’s a corporate offence to fail to prevent the facilitation of tax evasion, even if people are hired through an agent or convoluted supply chain. Corporates don’t have to stop evasion, just ensure they have reasonable procedures in place to prevent it from happening on their watch, otherwise they would be considered criminally liable if evasion takes place.

IR35 therefore presents a brand risk. They don’t want to be dragged through the press or go up in front of a select committee but they have to decide which way to go at the cross-roads: be overly cautious and go down a PAYE route or be too relaxed and risk investigation, such as the case of GSK.

With a PAYE route, corporates risk paying more and the possibility of getting caught up with rogue umbrellas, and have to consider employment law. Contractors are also aware that with employment rights in the mix, they could claim they were employees all along and make a claim for backdated holiday rights through to pension contributions. This risk to clients is so big they are now taking out insurance to protect themselves from such claims.

So, if you’re a client do you protect yourself and put down the shutters or go for fair assessments? In the banking sector we saw the former to be true at the start of the year. There was safety in numbers to apply a ban and it held consultants with very specific financial services skill hostage. They can’t easily move into other sectors so had to take the hit.

Pharma is different however. Look at Bayer,  it uses a third party assessor and conducts things fairly. It’s found a business case that suits an outside IR35 model.

But ultimately, it very much depends how many contractors you enlist to deliver strategy. It’s a potentially huge compliance undertaking if that number runs to thousands rather than dozens. And statistically the more on the books, the more likely you’ll have a more than average number of people qualified as inside IR35. You therefore have to weigh up the risk reward of doing it fairly in house, outsourcing it or changing tack completely.

A two track market emerges

Halting the use of contractors is a big decision too as this flexible skill is often the fire power behind delivering strategy. I can’t see this demand going away, so in the short term we will likely see bans continue as the corporates using the largest number of contractors decide to tackle the issue with rate rises than go with onerous compliance.

However, I think bans will fade away at the other end of the market where fair assessments can be more easily resourced and flexible skill is essential to scaling and growth.

In effect it will create a two track market, whereby very niche skill will be inside IR35. So, the stronger your case for being able to move from contract to contract, sector to sector, the more likely you will have a case for being outside.

It’s why we are seeing boutique consultancies popping up to help handle this dynamic and manage compliance on a smaller scale that suits clients of a medium size. We’re also seeing recruitment firms shift to engage on a statement of work basis to reduce the risk the client is exposed to. Then there are IR35 assessors like QDos providing an outsourced service and insurers underwriting the risk for clients.  

It’s worth remembering that 52% of engagements in public sector are now outside IR35. PSC bans didn’t last long because the market recognised it had to change in order to get the skill it needed to deliver projects.

What next?

If you’re facing a ban then there’s no way you will change a company’s policy. But you might be able to challenge on an exception to the policy if you have very specific skills. If you can’t, what do you do?

You could accept it and settle in for the long haul, accept it and get a short-termination in place and look for your next move, end your contract and move on even if into PAYE contract to protect yourself for a short-time, move immediately to an outside IR35 role, go on the bench having assessed your war chest, or go permanent.   

It’s a very personal decision but it’s important to understand the context and use the industry experts such as your accountant or an independent assessor to help you make the right decision.  

If there’s a chance you were inside IR35 then get an assessment done. It really is a must. Next look at how your skills transfer to other markets and then assess your bargaining power. Are you offering something that is in short supply, if so you have some leverage.

It’s worth looking at other possibilities that aren’t in the contractor heart land too. For example,  small firms offering a lower rate but outside IR35 contracts could be a great option.

But whatever you do, don’t go it alone. There are so many people who can help you navigate a way ahead that works for your personal aspirations. Seek them out and make a plan.

Inni.to/podcast has more information about our accounting services designed specifically with the outside IR35 contractor in mind, and a special offer to join.