IR35 private sector reforms: Blanket bans on limited company contractors hold firm despite deferral

Several weeks have passed since the government confirmed that the roll-out of the IR35 tax avoidance reforms to the private sector will be deferred for 12 months because of the Covid-19 coronavirus outbreak, pushing the start date for the changes back to April 2021.

In that time, it appears many private sector businesses caught within the policy’s scope have decided to use the 12-month extension to re-evaluate their approach to ensuring compliance with the new rules now that they have a little longer to prepare.

Under the reforms, from 6 April 2021, medium to large private sector firms will assume responsibility for determining how the contractors they engage with should be taxed, as part of a push by the government to clamp down on “disguised” employment.

Currently, it is down to contractors to decide whether the nature of the work they do, and how it is performed, means they should be taxed in the same way as permanent, salaried employees (inside IR35) or in the same way as off-payroll workers (outside IR35).

The government claims that leaving these decisions up to contractors to decide has led to some individuals abusing the system by deliberately misclassifying themselves as working outside IR35 in order to minimise their employment tax liabilities.

According to James Poyser, CEO and founder of online accountancy InniAccounts, news of the deferral has prompted a number of firms to switch up their IR35 compliance strategies, based on data collected by his anonymous contractor feedback site, Offpayroll.org.uk.

“Of all the updates we’ve had since the government announced the deferral, three-quarters of end clients have used it to defer their own implementation,” Poyser told Computer Weekly.

“For the most part, those who tried to assess contractors but made a hash of it are the ones who have decided to defer the implementation and are re-engaging contractors.”

These include companies that may previously have solely relied on HM Revenue & Customs’ (HMRC) much-maligned Check Employment Status for Tax (CEST) tool to assess the tax status of the contractors they engage with, or adopted a “role-based approach” to deciding how they should be taxed, Poyser added.

The latter approach means the firm in question has based its decision on how the contractor should be taxed solely on the job role they fill, rather than assessing the work they do, the way it is performed and without taking into account other factors, such as mutuality of obligation and substitution rights.

However, the rest of the firms that Offpayroll.org.uk holds data on appear to be ignoring the deferral and carrying on as though the original start date for the reforms still stands, meaning that any determinations they made about the tax status of their contractors before the delay was announced, remain in place.

This behaviour is particularly prevalent among firms whose IR35 compliance strategy consists of banning limited company and personal services company (PSC) contractors from their workforce ahead of the reforms coming into force.

“Those who banned PSCs without assessments have backed themselves into a corner,” said Poyser. “They have claimed all along that it’s a ‘procurement choice’, therefore it’s harder for them to defer while saving face. They have also already had the difficult conversations and many of their contractors have already walked.”

As previously reported by Computer Weekly, the issuing of blanket bans on contractors is a strategy that a number of high-profile financial services organisations, including HSBC, Lloyds Banking Group and Barclays, are known to have adopted in the run-up to the reforms.  

Speaking to Computer Weekly, Dave Chaplin, CEO of IR35 consultancy ContractorCalculator, echoed several of Poyser’s market observations, saying: “There are still firms blanket-banning now, and it appears they are now in the minority. You would hope that the banks, for instance, would stop their blanket bans, because there’s really no need for them any more because of the deferral, but that doesn’t seem to be the case.”

On the whole, most companies are happy to revert back to letting contractors decide how they should be taxed, and whether or not they would prefer to engage with clients as limited company contractors or on pay-as-you-earn (PAYE) terms, said Chaplin.

“There are companies that are assessing contractors, even though they have no lawful basis on which to do that, and then forcing them to work with them and engage in a certain way,” he added.

Computer Weekly has received copies of internal emails from contractors working across the financial services industry in recent weeks that confirm that many companies are holding firm on their contractor bans for the foreseeable future. 

For instance, in an email to staff dated 23 March 2020, insurance firm Legal & General confirmed that its IR35 compliance strategy remained unchanged, meaning that contractors can only continue to work for the company on PAYE terms or through an umbrella company.

“The only exceptions to this will be where a worker has already been issued with an outside-IR35 determination already confirmed,” said the email, seen by Computer Weekly.

“L&G feel this is the best approach to stabilise its contingent workforce, whilst acknowledging the global market conditions. It is also important to note the government has made clear that this is only a delay to the changes, it is not a cancellation of the changes.”

Computer Weekly contacted Legal & General for a follow-up comment, but received no response.

The email continued: “This is consistent with the approach being taken by a number of other financial services businesses.”

The same is true of the Nationwide Building Society, whose agency, Alexander Mann, emailed suppliers on its behalf within days of the deferral being announced to confirm that any contractors determined to be working “inside IR35” will still be classified as such, despite the delay.

“Nationwide have reviewed and considered the government’s latest announcement and, whilst they understand that these are challenging times, have made the decision that as your contractor’s engagement has been assessed as ‘inside IR35’, and therefore subject to PAYE deductions, and require that your contractor to be engaged via umbrella only,” said the email, seen by Computer Weekly.

In a follow-up statement to Computer Weekly, Nationwide set out its reasons for sticking with the determinations, which it said were made over several months and involved each contractor on its books having their status individually assessed.

“The work we have undertaken on the implementation of IR35 included a thorough review of all associated policies to ensure Nationwide’s compliance, alongside conducting individual assessments,” said a Nationwide spokesperson.

“With the vast majority of assessments being ‘inside’ and having completed this process prior to the government’s announcement, we felt that continuing to work to the original deadline of 6 April 2020 was the right thing to do.”

But Poyser is not so sure, and said firms that decide against “taking advantage” of the deferral to re-evaluate their approach to the IR35 reforms may end up regretting that decision come April 2021.

“It has become clear in recent months that contractors will reject being forced into umbrellas, be it through policy or poor-quality assessments,” he said.

“We expect, come April 2021, that more clients will be delivering fair IR35 assessments, meaning those who continue with blanket banning, or recommence in the run-up to April 2021, will suffer disproportionately as contractors will have more choice and can’t be bullied or be strong-armed into umbrellas.

“Clients have revealed their hands, and unless they make amends, this will come back to bite them.”

Chaplin also feels that, against the backdrop of the coronavirus pandemic, there is every chance that the IR35 reforms could be delayed again, beyond April 2021, or even cancelled completely. At which point, these firms will have cut themselves off from being able to use limited company contractors for no good reason.

“HMRC has saved face and said this is a deferral, not a cancellation, but I would say that’s extremely hopeful,” said Chaplin. “If I was a betting man, I would more than happily take bets that it will never go out in April 2021.”