Contractor industry mutes IR35 reform delay celebrations

Relief and rejoicing at the government’s decision to delay IR35 reform for 12 months has turned into cautious reflection about the practical implications for contractors – and clients.

Addressing the latter, former tax inspector Andy Vessey suggested that the chancellor’s promise of a ‘soft-landing’ from HMRC for the off-payroll rules is now not going to be kept.

“I would expect the 12-month soft landing assurance, previously promised for this year [by Rishi Sunak], to be withdrawn when the reform is implemented in April 2021.”

'Strict enforcement'

At Larsen Howie where he is head of tax, Vessey explained: “They will need to recoup as much tax revenue as possible to repair the huge dent in HMT’s coffers caused by COVID-19. 

“In other words, the [contractor] market has 12 months to get this right. After that, there will be strict enforcement – so no soft landing.”

With a similar eye on the coming year yet also sounding aware of the current health crisis is IR35 expert Kate Cottrell, another ex-Revenue inspector turned adviser to contractors.

“It is extremely sad that it has taken a pandemic…for the government to listen or appear to listen. Let’s now hope all those clients who have made blanket bans now change their tunes.”

'Stay of execution'

But speaking on the condition of anonymity, a third ex-tax officer says that clients won’t.

“I doubt that a 12-month stay of execution will see many companies going back to engaging contractors which they have determined are working like employees. I just can't see how that would go down.”

And ‘can’t,’ rather than ‘won’t’ is correct according to Orange Genie, at least for those PSCs who in the last few months responded to client blanketing by joining an umbrella company.

“It is difficult to see how you can unravel this…[not least because of] contractual notice periods and terms to consider. 

“We [therefore] believe it is highly unlikely that end-clients will terminate the new [umbrella] arrangement in favour of re-engaging with your PSC,” the accountancy firm said.

'Inside contractors who move to outside, at risk'

Worse still, implied the firm’s Helen Christopher, is the position of contractors whose clients decided them inside IR35 in preparation for rules biting next month which now won’t bite.

“[However] these reasons [behind the inside IR35 determination] will not have changed overnight,” she said.

“We know that many contractors don’t agree with those determinations and will likely want to continue in their PSC on an outside IR35 position. [But] as a contractor you may now be in possession of information that demonstrates your inside IR35 position and you are at risk if you ignore this.”

Larsen Howie’s Andy Vessey enforced the warning: “Anyone who has received an ‘inside-IR35’ status determination, having previously self-assessed themselves as outside and which HMRC may have now caught wind of, may now find the Revenue using this time to target them over the next 12 months.”  

A freelance software consultant believes the warning should be heeded. “What do people think will happen, when they work on a contract for a company that already stated it is ‘inside IR35?’

“Do they really think HMRC is that dumb?” the consultant asked on LinkedIn. “They will move up the list of investigations very quickly.”

'Getting away with it'

Contractor accountant Graham Jenner says the tax authority will at least be aware of the psychological dynamic that the legislative delay brings into play.

“Once you've said people are getting away with something,” he began, referring to HMT/ HMRC using its Lords off-payroll inquiry session to reiterate a 90% non-compliance rate.

“And once you’ve said things need to change as people are getting away with it, to then delay, just lets more people know they can get away with the same during the delay period.”

Ideally, the 12-month reprieve will be used to persuade the government to improve the legislation, the boss of Jenner & Co hopes, so that it only affects “those it is targeted at.”

'No such luxury for contractors'

Carolyn Walsh, managing director of Andraste Accounting is hoping for the same. “We have 12 months to get it [the off-payroll framework] right.

“Hirers in the private sector now have 12 months’ breathing space to overcome whatever COVID-19 -- swiftly followed by a predicted second outbreak and then Brexit, brings. But contractors have no such luxury.”

She explained: “IR35 has been in force since 2000 and remains in force today. Yet now the work begins to ensure that contractors who are working on a business-to-business footing with clients, do not get dragged into this mess this time next year.”

'Not a free pass for PSCs'

The subtext is that the government made clear in its delay-announcement that it remains committed to the reform – it is only the commencement date that is officially changing.

“Contractors should not be complacent”, urges Matt Fryer, head of legal at Brookson.

“This is not a free pass to use a Personal Service Company for a role that has now been captured inside IR35.

“Since responsibility for IR35 compliance remains with contractors for the time being, they need to ensure that are meeting their obligations over the next 12 months”.

'Tip of the iceberg'

Likewise, the IR35 obligations on contractors’ end-users in the public sector remain in force, as they have been since April 6th 2017.

“This [delay] announcement only applies to the reforms that were due to impact on the private sector from April 2020,” the Freelancer & Contractor Services Association clarified.

“The changes that were introduced to the public sector in 2017 are still very much applicable and will need to be adhered to. Furthermore, we are aware…that some businesses have spent in excess of £700,000 in preparing for the private sector reforms which illustrates only the tip of the iceberg of the cost to businesses and the economy.”

Indeed, accounting advisory Macintyre Hudson regards “the only blow” to businesses of the Treasury’s announcement to delay IR35 reform as the significant, and rushed outlay being seemingly all for nothing

“[They] have been working hard to prepare for the [off-payroll] changes and already adjusted contracts, processes, policies and infrastructure in time for the original start date in just 20 days, which was confirmed just last week in the Budget,” the advisory said.

'Heads in the sand'

Nonetheless, companies should keep on working hard according to Mr Vessey of Larsen Howie. “[Don’t] halt plans to prepare for changes,” he said in a bulletin for agencies and end-users. 

“Any investments you’ve made or are making in getting ready for the reform will not be wasted and will stand you in good stead versus competitors who are burying their heads in the sand.”

Recruiter Patrick Joyce sees it similarly, suggesting additional preparation made now for April 6th 2021 will be ‘grist to the mill.’

“Rather than mayhem and PSC bans being carried out,” he posted online, “if the supply chain now looks to further understand the process it will become clear that engaging with contractors compliantly is not as difficult as it seems,”

'Little comfort'

Matthew Sharp, partner at law firm Fieldfisher reflected: “While the move [to give engagers another 12 months’ preparation time] is welcome, it will come as little comfort to those workers whose contractor relationships have already been terminated by companies too daunted by the changes to assess and adjust their contractor relationships.”

He added: “Once the current coronavirus crisis subsides, government should use this 12-month extension to significantly improve the quality of its communication on this issue and address concerns with the efficacy of HMRC’s online tax assessment tool, which has proved to be unfit for purpose.”

Veteran contractor Alan Watts doesn’t think the Treasury’s move to delay is welcome at all: “[This deferral is] not a success of any kind, the damage has already been done.

“[That said], we should use this year to press for proper reform of IR35 and the off-payroll rules so that the damage is limited going forward. That means educating clients as much as the government.”

'Contractors will need to produce evidence'

Tom Cooksey, founder of IR35.io is another with a downbeat assessment. “I don’t think this [12-month delay] really helps anyone.

“Can businesses really reverse their decisions and bring back contractors who, in their opinion, are working inside IR35? Perhaps with more time they will engage with specialists and genuinely change their working practices.”

He even added an alert that, “for the next six months or so, [ I can envisage a world where] contractors themselves will need to produce evidence they are working outside IR35. They may even be required to buy insurance linked to that determination.”

'PSCs are perfect for continuity through coronavirus '

More upbeat is Pavan Arora, a director at recruitment firm Acorn, who hinted that the detractors of the delay to private sector IR35 reform are missing the point.

“This is a very sensible move by the government and while Twitter is overloaded with the 'damage is done' view, I have confidence in how we approach business in this country during periods of uncertainty.

“It's not too late [for] quick changes to risk, off-payroll [policies], and blanket rule decisions [to] be made in light of this delay," he said.

"Why? A flexible and remote workforce is key to ensuring continuity for many businesses and PSCs are perfect [for that] support.”

'Right decision, for the wrong reasons'

Even if that’s so, and limited companies do emerge as the answer to help enterprise through the COVID-19 outbreak, one senior adviser to contractors isn’t giving any credit to the government.

“This delay to the reformed off-payroll rules?” she asked. “It’s the right decision; for the wrong reasons!

“The Coronavirus has given them the chance to back down without losing face. We wouldn’t be where we are if it wasn’t for this pandemic – oh and maybe, just maybe, a few switched on Lords.”