Are you, your client and agency IR35 reform-ready?

Public bodies and PSCs are clearly realising that there’s only 70 days and counting before new IR35 rules for off-payroll engagements revamp how they -- and their agencies -- operate.

But the lesser known fact is that much of the work required to comply with the rules will need to start way before then, writes Seb Maley, chief executive of Qdos Contractor.

It would be somewhat of an understatement to say there is confusion around the April 6^th framework. The draft legislation is predictably complex and HMRC’s accompanying guidance fails to answer a number of key questions. Some public sector organisations have already started issuing directives concerning their own off-payroll workers and -- unfortunately -- some are clearly born out of a ‘kneejerk’ reaction.

End user responsibility – a red herring?

Throughout the consultation period the assumption was that the party paying the worker (normally an agency) would bear the full responsibility for the processes involved in the new rules. As a result, many agencies began planning how they would implement their new responsibilities. Given they would now be faced with a potential liability if they made a wrong decision, it was an issue they were taking very seriously.

Then there was a twist: when the draft legislation was released on 5th December, it became apparent that the public sector body themselves would be responsible for determining worker status. They would then communicate their decision to the agency who would simply have to pay the worker accordingly. Agencies breathed a collective sigh of relief and public sector bodies started to panic.

As things settled down, however, it became clear that an important piece of the jigsaw was missing from the legislation. Who would be liable if there was an IR35 investigation and a worker (or multiple workers) were found to be caught? Surely if a public sector body has made the decision they would have to be on the hook?

Apparently not. Because the agency becomes the employer for tax purposes under the new rules, they would carry the liability. It seems nonsensical, but it has been confirmed verbally by HMRC. It means that, in reality, very little has changed from the details in the consultation document apart from the public sector body making the decision.

As things stand, the public sector bodies themselves actually seem to have very little penalty or liability. Incorporating them into the process outlined in the draft legislation has had a pretty dramatic impact though; they now hold the cards and by their very nature are risk averse.

The consequences of a kneejerk reaction

Perhaps the natural (or predicable) reaction to all of this uncertainty and confusion is public sector bodies deciding not to engage any ‘outside IR35’ workers. In the past couple of weeks, it has become apparent that at least one large organisation is planning on taking this route.

The negative impact this will have will be significant. We are already seeing notable numbers of contractors leaving or choosing not to renew their public sector contracts -- and that is before their client or agency has even made an announcement. While there are roles available in the private sector, the public sector will be very quickly drained of a lot of vital resources.

Many people realise this -- both within agencies and public sector bodies -- but clearly feel they are in a ‘Catch-22’ situation.

The reality check

I make no bones about the fact that some public sector workers will rightfully be reclassified as a result of the reform. PSCs have clearly become a favourable trading method across various sectors and roles, down in no small part to HMRC’s failure to adequately police and enforce IR35.

However, there seems to be a widespread belief among public sector organisations that the vast majority of off-payroll workers are non-compliant. It is not surprising that they think that -- it’s exactly what HMRC have said on numerous occasions. This belief will drive a hard-line reaction to the new rules, meaning ‘genuine’ contractors won’t even have a chance to prove that they fall outside IR35.

To put a bit of context around it, if we take IT consultants as an example, between 75-80% we review are classed as outside IR35 in our opinion. In terms of testing our opinion, HMRC and/or independent tribunals have agreed with our view in over 1,500 cases and disagreed in just three.

These statistics will naturally differ from role to role, but IT makes up a large part of contingent work in the public sector and it would be hugely damaging to define all of these workers as ‘employed’ without question.

How it could work

As mentioned above, public sector bodies are well aware of the risk (not to mention the additional cost) in forcing everyone inside IR35. They are also aware of the fact that they are unlikely to have in-house experts qualified to make a judgement on the IR35 status of an engagement. An IR35 review based on the opinion of an IR35 specialist will enable the end-user to make an informed decision, and should gain the trust of their flexible workforce.

For it to work though, there needs to be a coordinated effort between all parties -- worker, agency and public sector body. That’s not as difficult as it may sound; at the end of the day it is in everyone’s interest for this to be done compliantly but fairly. Agencies will play a pivotal role in backing and implementing any such process, supported by a management system which will give full visibility to all parties in the chain. Some agencies can be reassured that, with some specialist IR35 reviewers, if a worker is deemed outside IR35 on the basis of the specialist’s review, the reviewer will then indemnify that decision to cover any resultant tax liability. Of course, this is just one of the seemingly unlimited number of tasks being arranged in the limited amount time left before the rules turn enforceable.