IR35 private sector reforms: Research highlights lack of preparedness ahead of April 2021 start date

Misclassification

Some contractors may have sought to deliberately misclassify themselves as outside IR35 to minimise their employment tax liabilities, as an inside IR35 determination means they are liable for Pay As You Earn (PAYE) and National Insurance Contributions (NICs).

According to the IR35 Shield study, more than half (52%) of the survey’s respondents are yet to have had their tax status assessed by their end-client, while nearly a quarter (23%) said the companies they engage with have responded to the news of the reforms by banning the use of limited company contractors entirely.

The research also shows that more than half of respondents said the companies they engage with are using HMRC’s much-maligned online Check Employment Status for Tax (CEST) tool to determine how they should be taxed, but 41% said they would dispute an inside IR35 designation should the tool return one for them.

“Our survey tells us that those firms that use CEST to conduct status assessments or apply blanket rules to negate their compliance obligations will encounter considerable disputes and recruitment struggles, with many going to the back of the queue when contractors are deciding on their next contract,” said Chaplin.

“Blanket bans on limited companies are an expensive way for firms to hire less talented professionals, while handing a competitive edge to their competition. Firms need to realise that if they apply best practice and with the correct contracts in place, they can continue to hire the best contractors with confidence.”

As previously documented by Computer Weekly, contractor bans are an approach a number of high-profile companies within the financial services, pharmaceutical and technology space have taken as a way of side-stepping the requirement to individually assess the tax status of every contractor they engage with.

Other more risk averse firms have also reportedly carried out blanket assessments of their contractors that have seen all of them declared as working inside IR35, as a precaution against receiving a fine from HMRC later down the line should they be found to have mistakenly misclassified the members of their contractor workforce later down the line.

Private sector engagements

According to the survey, 65% of respondents said they will actively avoid private sector engagements that are advertised as being “inside IR35”, while 72% said they plan to up their daily pay rates to accommodate the resulting drop in take-home pay they are anticipating will occur once the reforms kick in.

Some private sector companies have also told contractors they can only continue to work for them if they are willing to do so by operating via an umbrella company, which is something just 8% of survey respondents said they were happy to do.

The reasons for their wariness may stem from the lingering association between the use of umbrella companies and contractors finding themselves unwittingly engaging in tax avoidance schemes, as per the loan charge scandal. To this end, 61% of contractors said they would not apply for a role that was advertised as an “umbrella-only” engagement.

Contractors that receive an inside IR35 designation are often advised to cease operating as a limited company and provide their services through an umbrella company instead, who will assume responsibility for invoicing the client on the contractor's behalf and ensuring all of the required employment tax and NICs they are required to pay are deducted accordingly.

However, umbrella companies are unregulated and – in some instances – a lack of transparency about the deductions contractor pay packets are subject have resulted in some being made to pay more tax than needed or being reimbursed for the work they do in the form of non-taxable loans without their knowledge.

To avoid this, umbrella companies are legally obliged to provide a Key Information Document (KID) setting out details of their agreed rate, and the tax deductions they will be subjected to, but the IR35 Shield research revealed that 86% of the survey’s respondents had never received one.

“If firms permit the use of alternative payroll companies over in-house agency payrolls, they will need to conduct due diligence to ensure compliance. To aid transparency and compliance, agencies must also start providing contractors with Key Information Documents, a legal requirement since April 2020. Our survey indicates only 14% currently are,” wrote Chaplin in the survey’s accompanying report.

“While we anticipate many firms to apply knee-jerk approaches, we expect the market to return to normal, by which time most end-clients and agencies will have discovered IR35 isn’t quite the bogeyman some proclaim.”