As the six-month countdown to IR35 reform nears, is UK contracting ready?

I write this article as the UK sits just over six months away from IR35 reform in the private sector -- one of the biggest moments for contractors since the arrival of the IR35 legislation 20 years ago, and a moment that might prove to be one of the contractor industry’s most defining and a moment that, regardless of a rumoured Autumn Budget delay, will materialise, writes Seb Maley, CEO of Qdos.

Having spent nearly two decades working at Qdos, I have seen the various challenges that contractors have been forced to overcome in addition to the off-payroll rules over the years – ranging from the complex MSC legislation to the injustice that is the Loan Charge to the ongoing COVID-19 crisis.

Persistent threat

However, it’s IR35 -- and in recent years, IR35 reform -- that has been a continued presence and persistent threat to the livelihoods of limited company contractors. And while there have been a number of unsuccessful attempts to make this notoriously complex legislation easier to navigate -- namely the creation of the IR35 Forum and the short-lived Business Entity Tests, independent workers are perhaps more aware of the risks posed by the legislation than ever before.

This is because, on April 6th 2021 -- a date that is rapidly approaching -- contractors will lose the right to determine their own IR35 status, that is, unless they are engaged by a ‘small’ private sector business. Medium and large organisations, much like in the public sector since April  2017, will become responsible for administering IR35, with the party tasked with paying the worker -- either the agency or the client themselves -- set to carry the liability.

It's business, and personal

While this controversial and frankly unnecessary reform means IR35 is now a consideration for businesses, you might argue that it is still contractors who find themselves at a greater risk. After all, unlike recruitment agencies and hiring organisations, the financial implications of IR35 affects contractors -- as one-person companies -- personally.

Many contractors have read about, witnessed or sadly in some cases, experienced first-hand, the risk-averse approach to IR35 reform that some businesses are insistent on taking. And, unfortunately, it is this needless reaction to the incoming changes that has written the narrative around the changes to date.

Whether forcing contractors to work via umbrella companies, blanket assessing them inside IR35 or offering them ultimatums -- become an employee or leave, this short-sighted thinking jeopardises the future of independent working. It will also see businesses that need the skills, flexibility and cost efficiencies offered by contractors lose out on the host of benefits that contractors bring to the table.

Rights and wrongs

As we approach the six-month countdown to April 6th 2021, it’s important to make clear that not all businesses are doing things this way – the wrong way. Yes, there are plenty who need to rethink their stance and even in some cases, start preparing. But in recent months and following confirmation that changes will certainly go ahead, we’re seeing a growing number of businesses being pragmatic about the reform.

For example, our business is supporting over 2,200 companies, allowing for tens of thousands of fair IR35 status determinations. There are other specialists in status, of course, who are also helping businesses prepare for the off-payroll changes in a compliant manner, meaning it’s likely there are even more firms than just a few thousand which recognise the value of independent workers.

Judging by the past few months, I’m confident that many more organisations will follow suit, as end-clients start to hear and understand that IR35 reform is manageable. For example, I had a call just last week from a leading energy firm which, after realising that a competitor had adopted the formula to compliantly engage genuine contractors outside IR35, now wants to do the same! These are small, but nonetheless important developments.

CEST on the shelf

In a similarly positive development, we’re seeing businesses rule out using HMRC’s flawed and unreliable IR35 tool -- CEST, in favour of case-by-case IR35 status assessments carried out by a living and breathing, real-life expert. A handful of other firms, who were heading in the direction of ‘PSC bans’ have reconsidered this unnecessary response to IR35 reform and will instead continue to engage contractors in the future.

While this is progress, I’m anything but naive. I realise that many contractors have been forced inside IR35, had their contracts terminated in response to the incoming changes or are bracing themselves for the worst. Because of this, I know there is a lot of work that still must be done to convince businesses to take a measured approach to the new ‘off-payroll working in the private sector’ framework.

Crises

Fortunately, I’m not alone in my view that it’s in the best interests of businesses to continue working with legitimate contractors outside the clutches of IR35. The UK is facing up to the unprecedented challenges posed by COVID-19 and the long-lasting uncertainty surrounding Brexit -- which is due to conclude once and for all at the end of the year. There is also the matter of the economy, which is in recession – a bleak development that, from where I stand, means firms of all sizes, across all industries need contract workers who, much like in the 2008 financial crisis, I expect to play a key role in kick-starting the recovery.

As we head towards April 6th 2021, I understand why contractors fear private sector IR35 reform. For example, public sector changes introduced in 2017 -- viewed as the pilot project for next year’s reform -- have not increased IR35 compliance, nor have they been a success by any stretch of the imagination. They’ve simply raised tax revenues for the government which, in my view, stems mainly from thousands of incorrect IR35 status determinations.

Don't chance it, act

However, my message to contractors is to have faith. It’s easier said than done, I realise but it’s important in the lead up to the April changes. While in most cases you will lose the right to decide your IR35 status, that’s not to say you are completely powerless. As previously explained to readers of Contractor UK, you can take a number of steps to protect your tax position in the lead up to this sea change - I urge you to prioritise these to avoid being engulfed, and leave nothing to chance.

In the coming months, as we accelerate towards IR35 reform in the private sector, I expect that a clearer picture of the post-IR35 reform landscape will begin to emerge, and one that I will go as far to predict, will begin to demonstrate the willingness of businesses to approach the changes with an open mind.