IR35 private sector reforms: Firms risk legal action by pushing employers’ NI onto contractors

Private sector firms are leaving themselves wide open to post-IR35 legal action by unlawfully deducting employers’ national insurance contributions (NICs) from their contractors’ pay, claims tax consultancy ContractorCalculator.

The organisation is speaking out on the matter after conducting what it claims to be the largest study of its kind into the impact the forthcoming IR35 reforms are having on medium-to-large private sector firms.

More than 12,000 contractors responded to questions posed by ContractorCalculator about how the private sector’s response to the reforms is affecting their livelihoods, as the firms within its scope react to the new-found responsibilities it will impose on them.

The reforms come into force on 6 April 2020 and will see medium-to-large private sector firms take over responsibility for determining whether the contractors they engage with should be taxed in the same way as permanent employees (inside IR35) or as off-payroll workers (outside IR35), based on the work they do and how it is performed.

Previously, it was down to the contractors themselves to self-declare their tax status, but HM Revenue & Customs (HMRC) claims this arrangement had paved the way for contractors to deliberately misclassify themselves in order to reduce their employment tax liabilities.

When a contractor is classified as inside IR35, the company that engages them is liable to pay employers’ national insurance (NI), and there is anecdotal evidence to suggest some private sector firms are passing these costs down to contractors by cutting their rates.

The ContractorCalculator poll suggests this is happening in the majority of cases, with both agencies and private sector firms “unlawfully” deducting employers’ NI from the rate paid to their contractors.

Indeed, more than half (54%) of respondents said employer’s NI was being deducted from their day rates, and 45% claimed to have been told that being in-scope of the IR35 rules means they must pay NI on their client’s behalf.

“The majority of clients and agencies appear to be subjecting their contingent workers to effective double taxation by unlawfully deducting employer’s NICs from the contract rate,” the research said.

This suggests private sector organisations are misinterpreting HMRC’s IR35 guidance, and that the tax agency should be doing more to educate firms on this point, given that only 42% of contractors said they were aware that such deductions were unlawful, the research added.

“These unlawful deductions, many done accidentally through ignorance of the law, will likely lead to litigation through the courts as workers seek to reclaim monies that should not have been deducted,” the research warned.

On a related point, 58% of survey participants that have been classified as inside IR35 said they plan to take their client to an employment tribunal to ensure that if they are expected to pay the same amount of tax as a permanent employee, they should also receive the same benefits – for instance, paid sick leave, parental leave and a pension.

The lead-up to the reforms has also seen a number of private sector firms seek to sidestep the requirement for them to individually decide the tax status of every contractor they engage with by phasing out the use of off-payroll workers from their organisation.

According to the data, this is an approach 47% of the contractors surveyed said the organisations they worked for had adopted, with estimates suggesting that 52% of private sector firms in-scope of the reforms could be on course to lose at least 50% of their contractor workforce as a result.

Contractors were also asked to anticipate the impact they thought such decisions would have, with 41% predicting that long-term damage would be done to businesses as a result of the reforms, and 23% stating they would not be working for their current client after April 2020.

Just under one-fifth (19%) of the contractors surveyed said they were currently out of work, and about one-third of those (32%) within that category have been so for more than three months.

Dave Chaplin, CEO of ContractorCalculator, said the results “speak volumes” about the detrimental impact IR35 is having on the contractor community, as the private sector struggles to get to grips with the complexities of the legislation.

“The flexible workforce is being destroyed because many firms are not ready, do not understand how to navigate the legislation and are acting non-compliantly, primarily because they have been let down by HMRC’s lack of guidance and because the final legislation has still not been published,” he said.

“The fall-out will be damaging for many parties, as cases are litigated, firms’ costs increase, the self-employed suffer considerably reduced income, and mobility of the workforce is severely hampered.”

Chaplin added: “The findings of our survey provide overwhelming proof from 12,000 affected contractors that this policy needs to be cancelled. The government cannot ignore this overwhelming evidence and must, instead, delay and rethink.”