Contractors can’t be surprised at MPs' go-ahead to reform IR35 from April 2021, remarkable as it is

Yesterday’s vote in the House of Commons in favour of a Finance Bill amendment to extend the public sector’s off-payroll rules to medium and large businesses in the private sector from April 2021 is disappointing -- but not hugely surprising, writes Tania Bowers, legal counsel for the Association of Professional Staffing Companies (APSCo).

A remarkable green light for private sector IR35 reform

We were always told by the government that delaying the new IR35 framework from 2020 to 2021 was not a cancellation and only a deferral. Still, it is remarkable that MPs have now agreed, given a House of Lords inquiry found the legislation as not fit for purpose and needing a re-think.

In wake of what was the then-final call for members of the public to submit their IR35 opinions to MPs scrutinising the bill, ContractorUK recently reported that we updated our guidance for member recruitment agencies.

But the actual detail of that guidance will be revealed herein, hopefully helping those contractors who use agencies, so that they can see what their recruiters are being advised in relation to the now very much incoming off-payroll framework. Also here, we will outline our new guidance specifically for contractors, thanks to the latest draft of the bill offering a little extra detail on the ‘Client-Led Status Disagreement Process.’ With something as opaque as IR35, every little detail certainly helps.

For the uninitiated though, first a reminder of how we got here and our stance on it all.

How we got here

After five years of lobbying government for a proper review of IR35, we were obviously pleased and relieved that the implementation of IR35 reform in the private sector was delayed from April 2020 to April 2021. We are disappointed however, that it has taken a crisis of this extraordinary magnitude – a national pandemic -- for the government to act.

Although many of our members have spent an enormous amount of time and resource getting ready for these changes to IR35, we are very much of the mind that now is not the time to make flexible labour more expensive or the hiring of contingent labour more difficult. 

This delay may have a small hidden benefit however -- kick-starting those engagers of PSCs who, in a panic at seeing the new of-payroll legislation, have so far taken a short-term view of putting a ‘blanket ban’ on contractors.

Where we stand

Our position has always been clear. We know that access to skilled, flexible contractors has long been a strong contributor to the UK economy. They are highly skilled and utilise their expertise to carry out a specific assignment, helping firms to adapt, evolve and achieve success and these contactors will be especially important throughout the post-coronavirus economic recovery.

While the government has delayed the rollout until next year to avoid economic disruption during the Covid-19 crisis, we believe that this is simply delaying severe disruption to the self-employed workforce and is likely to further damage an already fragile economy.

The House of Lords seem to agree, having published a damning report on the legislation and warning that IR35 is fundamentally flawed. The inquiry by peers found that the taxation of labour should be made more consistent across different forms of employment, in line with the recommendations of the Taylor Review -- a move which would align tax and work status and provide a long-term solution to IR35.

Practical steps that contractor recruitment firms ought to be taking (now)

So what guidance are we handing to agencies, with private sector IR35 reform just 10 months away? Pleasingly, many larger staffing organisations have already completed a lot of the preparation work, but for those recruitment firms who are not yet ready there are still some practical steps that need be taken. These include:

• A review of the supply chain and communication with the agency’s clients and contractors.
• A consideration of new business models such as PAYE agency worker; ‘Statement of Works’ contracts; output-based contracts or consultancy models.
• A review of internal compliance and internal processes to ensure that they are fit for purpose.
• An agency-run review with the agency’s clients, particularly for agencies in an RPO relationship (where needs, risks and responses need evaluating).
• A decision on engagement models and approach to legal change.
• A project management timeline of the implementation.
• A programme of internal education and training.
• Implementation of contractual changes with the agency’s clients, contractors and umbrella suppliers.
• Preparation for continuous improvement and review post-April 2021.

Latest draft -- what it means for limited company contractors

But the latest draft provides further detail for contractors on the Status Disagreement Process. Crucially perhaps, the contractor is going to be allowed to make a representation that the status determination is incorrect – and this representation can be made at any time up to the date of the final payment made under the assignment. This is good news as the reality of an assignment status may differ from the SDS. (N.B. An SDS is completed before the assignment starts.  Once the assignment starts, it may differ from what was anticipated by the parties, meaning the SDS may not reflect the reality of the services being provided by the contractor.)

However, we'd advise against contractors relying on the disagreement process as a tool to influence an assignment. The disagreement process is still going to be ‘client-led. The client still has 45 days to respond, and their status determination stands during that period.  

So we recommend that a contractor should not take on an assignment unless they agree with the SDS. The disagreement process should be used sparingly, to resolve genuine disagreement.

We further recommend that contractors use the new power they have to ask the client to state their size if the contractor is unclear whether the client may be ‘small.’ However, again the client has 45 days of receipt to respond, so practically this may be of less use than it appears, although we anticipate (and hope!) that many clients will respond within a few days.

The future?

We will continue to lobby against these ill-conceived IR35 changes, and for an overall review of how independent contractors are taxed, even though MPs have now waved the changes through (to the Finance Bill’s critical ‘Report Stage’), with a view to them taking effect from April 2021. The government have promised a more detailed review of the impact of the public sector changes before April 2021, and a detailed review of the impact of 2021’s implementation after the framework goes live. That’s another example of a small development looking helpful, although it does fall somewhat short of what almost all stakeholders are calling for (i.e. a review of the changes before they take effect).

That said, we have seen last-minute changes of policy on IR35 before, and the off-payroll framework has risen significantly up the political agenda since the summer of 2019 when the Finance Bill was first published. Covid-19 has dramatically changed the economic landscape and Labour, the Liberal Democrats, the SNP and some Conservatives are all calling for the IR35 changes to be scrapped in favour of legislating change to employment status as recommended by the Taylor Review. In these unprecedented times any outcome may be possible – we shall have to wait and see.