IR35 private sector reforms: Deloitte confirms post-April 2021 ban on PSCs

Deloitte has confirmed that its response to the incoming IR35 private sector reforms includes a ban on working with limited companies and personal service companies (PSCs) from April 2021 onwards.

In a statement to Computer Weekly, a Deloitte spokesperson confirmed that the company has introduced a policy that states it will only engage contractors willing to work via employment agencies or umbrella firms from April 2021 onwards, as part of its IR35 compliance strategy.

“Deloitte’s freelancers, independent contractors and consultants bring a huge range of skills to our firm,” said the statement. “This dynamic and flexible talent pool is very important to us and that won’t change.

“However, we need to ensure that we are compliant with the government’s new off-payroll working rules – the complexities of engaging with contractors through PSCs mean this is no longer a viable option for Deloitte.

“Going forward, we will engage them through employment companies – also known as ‘umbrella’ companies – or agencies. We continue to stay in close contact with existing contractors and with employment companies on these changes.”

In an email seen by Computer Weekly, Deloitte chief financial officer Donna Ward told contractors that its decision to “prohibit the use of associates through personal service companies” is its way of “managing tax, commercial and reputational risk” posed by the IR35 reforms.

“This decision is aligned with many of our clients, who have introduced similar prohibitions – an approach we expect to accelerate,” wrote Ward.

“All PSCs will therefore be removed from our supply chain as of April 2021, a change which will take effect irrespective of any (last-minute surprise) delay to the IR35 legislation.”

As per the terms of the incoming IR35 reforms, from 6 April 2021, medium to large private sector firms will be required to assess the tax status of every single contractor they engage with, on a case-by-case basis, to determine whether they should be classified as employees for tax purposes.

If a contractor’s engagement is classified as being in-scope of the IR35 rules (inside IR35), this means the contractor must pay the same employment taxes and national insurance contributions as a permanent employee would.

Currently, it is up to contractors to decide for themselves whether the work they do, and how it is performed, means their engagement falls within the scope of the IR35 reforms, but HM Revenue & Customs (HMRC) claims this system of self-declaration is open to abuse, in that some contractors may seek to deliberately mis-classify their engagements as being outside IR35 to minimise their employment tax liabilities.

As referenced in Ward’s email to contractors, Deloitte is far from the only private sector company opting out of directly engaging with contractors ahead of the IR35 reforms coming into play by asking them to work via pay-as-you-earn (PAYE) umbrella companies.

This is a strategy a number of high-profile companies in the financial services, pharmaceutical and technology space are known to have taken ahead of April 2021 as a means of side-stepping the reforms.

This is because signing up to an umbrella company typically requires the contractor to cease trading as a limited company and become the umbrella’s employee. As such, a private sector firm is no longer required to determine how the contractor should be taxed, because they will already be on the umbrella company’s payroll.

According to Dave Chaplin, CEO and founder of contractor tax compliance consultancy IR35 Shield, the approach that Deloitte and others are taking to ensure compliance with the reforms is not without its risks, especially when it comes to attracting contractor talent in the future.

“Blanket bans on limited company contractors are an act of self-harm,” he said. “They result in rising costs and being sent to the back of the queue when trying to attract the best talent, not to mention handing a considerable advantage to competitors who are prepared to treat contractors fairly.

“Firms need to realise that if they apply best practice and have the correct contracts in place, they can continue to attract the best contractors without undue risk.”

Deloitte has 13,888 registered employees in the UK, according to its 2020 financial statement, and is renowned for relying heavily on contractors to carry out its wide-ranging consultancy work, which includes advising enterprises on digital transformation strategies.

The company also offers a technology-backed, IR35-focused advisory service, designed to offer private sector firms guidance on how to ensure their contractor “on-boarding/resourcing” processes comply with the incoming changes to the off-payroll working rules in the private sector.

The cornerstone of this service is its cloud-based IR35 Workflow offering, which is marketed by Deloitte as a tool that can “take the burden out” of complying with the reforms.

“Compliance with IR35 can be challenging considering the high volumes of contractors that many businesses deal with,” says Deloitte’s IR35 Workflow website blurb. “To determine the employment status of each of these, there’s a lot of information to manage and many individuals involved at each stage. Staying on top of this process and having a clear audit trail for HMRC is critical.

“Our IR35 Workflow tool…provides a structured approach to defining the steps, resources and people involved at each stage – and helps you manage each employment status review case from end to end. Hosted in the cloud and fully secure, you can add as many users as you need to build a system that scales with you.”

The fact that Deloitte is seeking to side-step the IR35 reforms while also positioning itself as a company that can offer advice and services to others on how best to negotiate the legislation raises eyebrows, said IR35 Shield’s Chaplin.

“The IR35 irony continues in the market,” he added. “Only last week we saw Zurich ban limited company contractors despite underwriting IR35 insurance policies and now we are seeing a large consulting firm that advises others on off-payroll matters choosing not to engage with the legislation. Smaller consulting firms will see this as a great land-grabbing opportunity.”