IR35 News and Outlook: 14/02/2020

In a decade of tracking IR35, we’ve never seen a week move as quickly as this one. We’ve seen 11th-hour guidance from HMRC (some good, some bad), the Lords weighing in, protests, u-turns, projects impacted and an unrelated but significant resignation. 

Stepping back, it’s clear that the turbulence around IR35 is increasing, and we expect this to be the case over the coming weeks. But one key sub-trend that has appeared this week is a shift in the balance of power, and smaller clients breaking through with fair IR35 assessments.

Just two weeks ago, it was clear that large organisations were unfairly pushing many self-employed into PAYE roles, driven home with a message of “what else are you going to do?”. This week, the contracting and consulting community has answered this question: “walk”. We explain why in detail below.

But don’t expect much movement from the largest clients with blanket bans. The scale of the task ahead of them is enormous. With IR35, you either have to do it right, or not at all. The largest companies are like oil tankers: they cannot shift direction easily. 

There is plenty of good news if we look outside the biggest clients. For the next tier of clients, it’s more achievable to update working practices and deliver fair IR35 – and that’s what many are doing. Yesterday we visited an IR35 assessment company who are struggling to keep up with the surge in demand for their services. We’re seeing clients such as Eurostar, Skanska, Bayer, Just Eat, William Hill and more deliver fair IR35 assessments. We’re also starting to see u-turns and successful SDS challenges.

If this weren’t so niche, it would make a gripping movie. 

Tangible developments

HMRC’s position on pursuing tax for those moving inside IR35

HMRC have updated their Employment Status Manual – the operating guidelines for tax inspectors. In the latest edition, they have issued new guidance, but their position on retrospective action remains unchanged:

“[Where] a worker who has previously been regarded as self-employed should now be treated as employed, then you will need to consider whether to pursue the employer for NICs and tax for back years”

“For NICs, you should seek all arrears but, if you have to take enforcement action on arrears from the employer, you should limit this to the previous six years

This means that there is a clear risk of HMRC opening an investigation should a self-employed worker (outside IR35) now be reclassified as employed (inside IR35). 

Unless we see an amnesty that is bound by legislation and not just assurances, we recommend that clients who are confident in their position to carefully consider the tax investigation risk of remaining engaged with a client who now deems them inside IR35.

Contractors and consultants do have an exceptional track record of defeating HMRC in tribunals (an 88% success rate), but the process alone of an investigation can be stressful. We recommend you consider carefully your next steps to minimise risk, and also consider IR35 insurance.

House of Lords announces enquiry

The catchily titled House of Lords Finance Bill Sub-Committee is holding an enquiry into the draft finance bill. Remember, April’s off-payroll changes haven’t been accepted by parliament yet. They’re part of the finance bill – the instrument that allows the chancellor to enact their announcements. Technically, the finance bill has to pass through both the Commons and the Lords before it gains royal assent and becomes law. But don’t get your hopes up of a Lords revolt: the last time they blocked a finance bill was in 1909 – it’s an unwritten rule that they don’t.

That’s not to say this enquiry isn’t without merit. It’s the opportunity for evidence to be given on the record, which in turn limits ministers ability to deny all knowledge of the negative consequences of this reform. We’ve already heard from three of the UK’s largest accountancy professional bodies calling for a delay or “softest of soft landings” as businesses simply aren’t ready. 

You too can submit evidence, and we’d encourage you to do so. For example, this week a minister stood up in the Commons and said they’d seen no evidence of blanket bans. We know that’s simply not true (we’ve sent him the evidence, and he replied to our letter). So please do write to the Lords. What they’re looking for and how to respond can be found here. One tip as you pen your letter: imagine you were being interviewed by Jeremy Paxman. No hearsay, stick to the facts.

We’ll be submitting our recent research as evidence. 

HMRC’s review set to conclude next week

Sajid Javid (remember him?) announced a review of the roll out of the off-payroll reforms. This review is likely to be uneventful. I’d expect HMRC to say they’re going to spend more on “client education”, and that’s about it. Apparently Tuesday 18th is the day to watch.

HMRC’s reasonable care guidance updated

All clients need to take “reasonable care” when assessing IR35, and this week HMRC published guidance on what is and isn’t reasonable care. 

Things that do not constitute reasonable care include:

  • Putting all PSC workers inside IR35 without looking at individual cases
  • Putting large groups of workers inside IR35 without looking at the individual working arrangements for each worker
  • Not training or supporting those who are making the determinations, or completing the SDSs
  • Inputting inaccurate information into CEST
  • Failing to take into account all relevant evidence 
  • Using a third party, and not confirming the accuracy of their conclusions 

If we look at the feedback we’ve seen on, unfair assessments are rife – and our gut feeling is that 75% would fail to hit a quality bar on at least one of the above indicators. We’re very sympathetic towards end clients: IR35 is complex, the task is enormous, the goalposts are still shifting, and there aren’t enough experienced assessors for the volume of assessments required.

But it means it’s worth quoting this if you challenge your determination.

You can read it in full here.

HMRC shift cut-off deadline

Up until this week, the line in the sand for assessments was the payment date of the work undertaken. If you worked in March, but your invoice wasn’t settled until April, then your March work would fall within scope. This drove an exodus of contractors at the end of January, who were keen to serve notice and leave clients before the end of Feb, meaning they got paid in this tax year. 

HMRC have changed this aspect of the policy. It’s now just the date the work was completed that counts – not the payment date. But don’t reach for the bubbles: this only buys you an extra three weeks. The next tranche of contractor churn will start on 28th Feb as contractors stand down to avoid working in the new tax year with the same client.

We published our research

This week we (inniAccounts and our new sister site published some timely and unique insights into the impact off-payroll reform is already having on contractors and clients alike. We’ve forecast a £2.2bn productivity gap in H1 2020, a wider macro-economic impact as a result of projects stalling and highlighted the toll on the mental health of contractors. This research has been widely shared and cited by the mainstream media.

You can view a copy of the research here.

Hundreds march on Parliament

On Wednesday, hundreds of contractors, consultants and self-employed individuals marched on Parliament, culminating in the delivery of a letter to the Treasury. We were there showing our support, and working hard to raise awareness of the situation with the journalists covering the event. Here are our 30 seconds of fame with Citywire.

Sajid Javid has resigned

Yesterday Sajid resigned. As much as we’d love to believe it, let’s not pretend it had anything to do with off-payroll reforms. The question is, what now? It sounds like the power has shifted to number 10, so we need to watch Boris and Cummings closely.

Potentially breaking stories

Contractors are walking away from clients

1 in 2 contractors are planning on walking away from clients, with even more poised on the results of SDSs, or an outside IR35 gig appearing. This number is much higher than we or end clients expected. There are four factors driving this: 91% of contractors don’t trust HMRC and would rather move to another client (even inside IR35) than move onto PAYE  with the same client; over 80% of contractors have war chests; around half have third party legal determinations that put them outside IR35, and most are confident the market will return.

The cost of this game of musical chairs alone will deliver a £2.2bn productivity hit, before we account for project impacts.

Project impact being felt

We’ve spoken to thousands of contractors over the last few weeks, and many have come forward to talk about the real impact is having on client projects. It’s far-reaching: we’ve heard of defence exports at risk, regulatory projects on the verge of FCA intervention, client penalties and more. We surveyed project managers and discovered over 80% don’t have enough mitigation in place to deal with the impact of the reform. 

We’re working hard to get this story heard.

Rise of contractor solidarity

It’s been a tough few weeks for many contractors and consultants. But there are some incredible stories of solidarity emerging. We’ve seen warmth, help and advice on social media, support groups set up and even private Telegram groups set up to help share information. Our highlight of the week is a group of contractors on a project, who are confident in their status, telling their hirer that if any one is unfairly assessed they all leave the project.

IR35 assessors are busy, with good news

We visited an IR35 assessor this week – they work with clients and agents to determine status. They are VERY busy (which is a good thing). They told us how many organisations were behind the curve, and have only just started to plan for April’s changes. There’s lots of good news coming from this company: they’re determining many thousands of contractors outside IR35, and for many others, clients are open to changing working practices to get a good outcome.

Given how busy they are, and how hard it is to scale a business like that, it does make us think there will be an assessment backlog for many months. This adds weight to a call for HMRC to delay this legislation.

“Deep dive units”, SDSs overturned, u-turns

This story also broke this week of “deep dive IR35 units” – teams within clients who have been tasked with reassessing contractors to get determinations right. This has been driven by both the number of contractors who are willing to leave unfair clients, and in many sectors (pharma is a prime example) the competitive pressure of competitors getting IR35 right and poaching talent. 

This is starting to show up on – we’re seeing SDSs overturned.

Offshoring ramping up

In not-so-good news, we’re also hearing of offshoring ramping up. Almost 1 in 2 in our research had witnessed it in some form. We know of a media outlet that’s chasing this story hard, so keep your eyes on the news.

What are inniAccounts doing?

In December, we asked our clients what they’d like us to do to help them prepare for April. The top answer was ‘lobby’. And that’s exactly what we’ve been doing, tirelessly. 

You may not be aware, but inniAccounts was founded by (and is still managed by) former contractors, consultants and freelancers. It’s a topic we’re really passionate about and understand the real value this flexible, expert workforce brings to our economy. It’s something the UK should be proud of.

On the whole, we’re not against IR35 – but what we are opposed to is unfair or flawed assessments or organisations that are simply banning small enterprises from engaging with them. This is deeply unfair.

So far we have:

  • Built the website, to allow contractors to find fair clients, agents and contracts, whilst sharing insights on those who aren’t getting it right. We’re now tracking over 500 clients and building a directory of vetted agents and boutique consultancy firms
  • Set up a LinkedIn page, where we’re connecting contractors and sharing the latest news, as it happens. In the last few weeks alone, our posts have been seen almost 2 million times.
  • Conducted research into the impact of April’s reforms. We’ve shared this with the government, the media, end clients and the contracting community.
  • Lobbied. We’ve visited MPs in Westminster, written to the (then) Chancellor, pushed our research further into the government machine and we’re now preparing our Lords submission.
  • Attended the march, and played our part in getting the message out.
  • Worked around the clock to get the story in the press – there have been 25+ news stories been published so far
  • Supported countless clients and agents who want to get IR35 right – we’ve been signposting them to a group of brilliant IR35 assessors and insurers

What we’re not doing: setting up an umbrella

If you need an umbrella company, please get in touch with your account manager – we’ve negotiated a discount on one for you. But we’re not going to set one up ourselves, here’s why:

The reason for this is one of economics, scale and passion. As trivial as a brolly sounds (it’s just payroll, right?), they are very complex and risky – and you need huge scale to run one (and deep pockets just to get on PSLs). We’re a small business, and we need to be careful about our cash and resources: setting up a brolly would be commercial suicide. Particularly as it’s likely to be short-lived: HMRC say 66% of contractors are outside IR35, and 75% of contractors think the outside IR35 market will return. We’re confident it will too.

Having briefly worked through brollies in our former contracting days, it’s not something we can get passionate about. As a team, we LOVE supporting clients who are outside IR35, and building their businesses. Skilling up, side-hustles, building home offices, exploiting opportunities, training days, overseas engagements, branding – these are the stories we love to hear about from our clients. (Remember, inniAccounts started as a project on the side of contracting). Occasionally we have the pleasure of calling clients to tell them they’ve outgrown our services. We wouldn’t get that buzz from running an umbrella, and that wouldn’t be fair for anyone.

That’s why, instead of building a brolly, we’ve partnered with someone who’s excellent at it. If you need one, call your account manager today for your discount.

How can you help?

First priority: submit your evidence to the House of Lords. Secondly, follow on LinkedIn, share the content, and raise awareness of the impact of this reform. 

And thanks for all the offers of beer, coffee and lunch – your messages of support are a big motivation for our campaigning. This is something we’re more than happy to do for the community that we’ve been part of, and now served for years. If you think we’re doing a good job, and want to say thanks, the one thing we’d love more than anything would be for you to appoint us as your accountant. Hopefully, that’s not too cheeky? :-/

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