Why the ticking timebomb of IR35 reform can be defused by Finance Bill 2019-20

With uncertainty over IR35 reform in the private sector stretching back to when the reform was first mooted -- early 2016, tomorrow’s publication of Finance Bill 2019-20 can’t come soon enough. It may even diffuse what we’ve called in our latest report a ‘ticking timebomb,’ writes Joe Tully, managing director of Brookson Legal. 

We used the phrase not to scaremonger, but because we uncovered that despite the proposed changes to IR35 representing one of the largest reforms in the history of contractor tax law, almost half of engagers have done nothing in preparation. So costs, tax bills, flexibility and talent-supply, among other areas, are all set to implode, but inaction is the action of many. 

Here’s why tomorrow’s bill could represent a flick-switch in this ticking timebomb scenario. When we asked ‘why’ to the 45% of engagers who have not lifted a finger towards defusing this wiry mess of status, tax and compliance, there were three reactions:

1. Almost half said they are waiting for more HMRC guidance.
2. Almost three in 10 want to first see the government response to the Off-Payroll consultation.
3. A third said they were waiting until ‘nearer’ the April 2020 commencement date.

Well, after tomorrow, reactions one and two (above) will no longer be a barrier. From what we understand, the bill is due to be published alongside fresh HMRC IR35 guidance, which itself is due to appear from -- or next to -- the official response to the off-payroll consultation – the document containing the proposals to reform IR35 from 2020.

Regarding the third point, time is certainly running out for engagers to act ahead of the IR35 changes. In fact, in our report, ‘IR35: A Ticking Timebomb?’ we found that on average, businesses that utilise contractors believe it will take them six months to prepare for IR35 changing.

An audit is one of the first sensible steps. It should be noted that some in the agency space have suggested that end-users auditing their contractor workforce, when they’re only all on 3-month contracts, is a waste of time. Yet we find that, at most clients, the majority of contract roles that they have today are contract roles that will also be required post-April 2020. Therefore, better understanding the IR35 statuses of those roles now is very helpful, even if the individual on-contract performing the work changes between now and next April. If something changes in the working practices, or regarding the way in which the role is performed, we would advise clients to look at it again.

We would also advise contractors’ clients not to fall into the trap that 24% of engagers have fallen into -- taking contractors on as permanent staff. We regard this as both an unneeded and unwanted step, leading to reduced flexibility, increased costs and contractors potentially out-of-pocket.

The big advantage contractors offer is that they’re a flexible resource that hirers can choose to flex up or flex down, depending upon business demands. Equally, many contractors choose to work in this external, independent, hands-off way because of the flexible working lifestyle that it offers. If hirers approach the new rules in a measured and sensible way, they will be able to identify those workers who can remain outside IR35, thereby avoiding the loss of flexibility that both sides enjoy, as well as the cost impact for both parties.

Our definition of ‘sensible’ does not include waiting to defuse the IR35 reform timebomb until the very last-minute. This approach is naturally conducive to making the wrong decisions, or decisions that fail to demonstrate “reasonable care.” Clients should remember, and agencies and contractors should remind them, that in most contractor workforces, there will be those contractors whose status is difficult to determine. These are the instances where the client should take proper advice to ensure they make the right decision and to see whether there is anything that can be changed, regarding such contractors’ working practices or contract, to keep them outside. Failing to do this will result in more contractors being deemed inside IR35 than is necessary, likely resulting in a reduction of contractors in the market; reduced flexibility for the engager, increased engager costs (such as Employer NICs) and reduced take-home pay for those affected contractors.

But don’t just take our word for there being square pegs that don’t fit neatly into HMRC-designed round holes. We already know that CEST cannot determine status in a significant 15% of cases. This tool has been greatly discredited in the public sector and fortunately, the private sector appears to have heard -- and taken on board -- the criticisms. 

One positive of CEST and other IR35 contract review devices (human or otherwise), is that in some cases, they have helped clients realise that their operations were not treating their contractors as external expertise, bought in to perform a particular service or projects. Typically, it’s clients who have not historically had to worry about IR35 who have tried to make their contractors feel ‘part of the family.’ This has been done with the best of intentions to make the contractors feel valued, but it can cause problems under IR35, so the steps being taken now to ensure the relationship is more business-to-business in nature are welcome.

Indeed, done properly, sensibly, and not with a panicked, shaky hand as the clock ticks down to IR35 reform being armed from April 2020, most contractors know that any ties to anything that looks like ‘integration’ need to be cut. Shrewd clients will make their PSCs, and even their agents, part of the squad which needs to render IR35 reform safe, so at least their own commercial operations will be safe from the imminent framework’s explosive implications.