Why one third of contractors being placed outside IR35 is a platform from which to build

It’s been two months since IR35 reform was introduced in the private sector and the dust has now settled on what was without doubt the most significant moment in the Intermediaries legislation’s lifetime.

So has a new IR35 brought contracting to its knees, as speculated? Or, writes Seb Maley, CEO of IR35 advisory Qdos, is it business-as-usual, meaning the fears were totally unwarranted?

Neither of the extremes

Well it’s neither of these two extremes, by the looks of it. Judging by our study that some 2,000 contractors affected by IR35 reform participated in, as things stand, the initial impact is somewhere between the two.

The survey – which was put to contractors in mid-April – suggests that 65% of contractors able to continue working via a personal service company by their client were assessed as inside IR35. The remaining 35% were considered to be outside the clutches of the legislation.

So what should we make of this split – two-thirds inside, one-third outside?

It’s not what we would have hoped for, I’ll give you that. But I think it’s a better balance than many people expected.

The platform

And perhaps most importantly, it’s a start. It gives us a platform from which we can build. Because the 35% statistic – which incidentally is supported by other industry research – is in sharp contrast to our own experience when helping businesses assess IR35 status.

For example, 86% of more than 32,000 contractors assessed through the Qdos Status Review facility were considered outside IR35. I’m not referencing this for promotional purposes, but to show that the market has some distance to go until it reaches a point where the right number of contractors – or at least what we see as the correct ratio – are working outside IR35.

Realism, rethinking and reality

Am I being realistic? Will businesses rethink the risk-averse approach and embrace fair, well-informed IR35 decisions? Not all of them, no. But in time, as firms see their competitors reap the benefits – from savings to flexibility and skills – of compliantly engaging contractors outside IR35, I believe we can make significant progress.

So almost needless to say, educating businesses in this area will remain one of our top priorities going forward.

Of course, this has its challenges and some firms may be concerned about HMRC’s most recent compliance activity – particularly Gary Lineker’s IR35 case, which just so happens to be the most high-profile case in the history of the off-payroll rules.

But the reality is, Lineker’s IR35 battle, along with two separate and relatively new HMRC IR35 enquiries received by us, may prove important in showing to businesses that contractors can be safely engaged outside IR35. That is, assuming these cases don’t go HMRC’s way.

Even if Lineker loses, firms need to be made aware that the Match of the Day host’s engagement is not a typical one. Staggering sums involved aside, the fact of the matter is that the vast majority of contractors will work under significantly different terms, where demonstrating outside IR35 status is a lot more straightforward.

From Lineker to Lee

Interestingly, as I write this, it has just emerged that a different limited company contractor has lots his appeal at the Upper Tax Tribunal. So a surprise and rare win for HMRC. Does this change of the points I’ve made above? No.

I’ve already said that when reading the judgment, at times, it could have gone either way and so you could say Robert Lee was unfortunate. His contract included the right to provide a substitute, for example, but this right was never exercised.

Meanwhile, his client – Nationwide -- were said to value Mr Lee for “his specialist expertise and familiarity, gained over many years.” While that sounds positive for a specialist, this disclosures pointed towards personal service, resulting in Mr Lee’s substitution clause being disregarded.  

Mutuality of Obligation was also found to be present, albeit after some hesitation. There was an obligation for Nationwide to provide work to Mr Lee, but only for the period of each contract. This raises yet more questions about MoO and how much impact its existence in a contract should have on IR35 status. 

The future

However the case notes do suggest that MoO itself will be looked at again in the upcoming PGMOL case, which may even give Mr Lee grounds to contest the outcome at The Court of Appeal.

These are developments we will continue to keep a watch of, while making clear to the thousands of organisations we support with IR35 compliance, and the wider business community, that in our experience, the vast majority of contractors belong outside IR35 and can certainly be engaged that way with peace of mind.