As Irving Berlin wrote back in the 1920s…’there may be trouble ahead’, which is a fitting line and warning to recruiters, clients and contractors as we countdown to the roll-out of the Off-Payroll rules that will come into effect in the private sector in just a matter of weeks.  For those hirers who have taken a compliant, strategic and fair approach to assessment, they can face the music and dance confidently into the future with little upheaval.  But, as Dave Chaplin, CEO of compliance solution IR35 Shield warns, those that have left the matter too late look set for short-term disruption.

Off-Payroll chaos ahead
Firms that have failed to conduct status assessments or agreed alternate engagement models in advance will be without valuable contracting talent once the Off-Payroll rules take effect which will threaten considerable damage to projects.

And, firms that have imposed blanket bans on limited company contractors to negate their compliance obligations and tax risk could also find themselves similarly devoid of contingent labour – 65% of contractors told a recent IR35 Shield survey of over 3,000 respondents that they would not work ‘inside IR35’.

But non-compliant firms are not the only potential victims of this approach. With many firms and agencies looking to the unregulated umbrella market to process payrolls for their contingent workforces, thousands of contractors risk being duped into non-compliant tax avoidance schemes.

Backlash beckons for non-compliant firms
Non-compliant parties will also suffer backlash from contractors and industry stakeholders. Some websites are naming and shaming firms for non-compliant practices, and others are preparing to bring group litigation for unlawful tax deductions from contractor income.

Disgruntled contractors seeking compensation for ‘inside IR35’ determinations by way of workers’ rights will also be buoyed by Employment Tribunal (ET) claims such as that brought against HMRC in 2018 by Susan Winchester, a contractor who secured a £4,200 holiday pay entitlement to accompany an ‘inside IR35’ engagement with the taxman under the Agency Workers Regulations (AWR). The recent Supreme Court Decision on Uber also highlights that hiring “inside IR35” using a deemed model is now potentially untenable because workers’ rights may still be claimed.

Who will benefit from the new rules?
Firms that adopt fair and accurate compliance processes stand to gain newfound popularity among the most sought-after contractors almost overnight

Agencies partnering with compliant firms should, therefore, find placements easier to come by. With many small hiring firms perceivably less tempted to impose blanket bans than larger companies due to the associated heightened cost of engagement, it could be that the small agencies tied to these companies benefit.

Small consultancies providing contracted out services also fall outside of scope, due to the small company exemption clause.  This will likely mean that they will likely thrive as contractors seek engagements with these companies to secure fair treatment whilst still taking care of their own tax affairs under the original IR35 rules.

The changes are also expected to benefit overseas opportunities at the expense of HMRC. Contractors based outside of the UK will be viewed more favourably by firms who can rely on fully remote workers while UK contractors may increasingly look to overseas consultancies who are not subject to the Off-Payroll rules.

Supply chain compliance to come under scrutiny
Though it may not happen immediately, supply chain compliance will come under greater scrutiny. This has been made a necessity by the Off-Payroll rules’ debt transfer provisions, which permit HMRC to pursue agencies and hiring firms for unpaid tax liabilities resulting from non-compliance elsewhere within the supply chain.

Despite continued calls for regulation of the umbrella market to tackle non-compliance, Government has offered nothing in the way of assistance. The taxman’s policing of the matter has proven so farcical that a Commons report recently exposed HMRC for itself engaging contractors via such schemes as recently as July 2020.

With these schemes often difficult to identify, some hirers have decided to insist that their recruitment partners only operate their own internal payroll. Some umbrella company providers are now offering a payroll bureau service as a result.

We could also see cautious hirers requesting agencies to indemnify them against any risk caused by events further down the supply chain. And to gain the confidence of clients and supply chain partners, the documenting of audit trails may soon become common practice among agencies and umbrellas.

HMRC enquiries no concern for compliant companies
It may be a surprise to some, but we do not expect HMRC enforcement to be particularly problematic for agencies, although agencies who are promoting tax loss insurance must be careful not to fall foul of the Managed Service Company Legislation, which is akin to all their contractors being found ‘inside IR35’, irrespective of the actual status in law.

Remember that, under Off-payroll, the end-client only offloads the tax liability risk onto the agency having assessed the contractor’s IR35 status and provided a Status Determination Statement (SDS) that demonstrates ‘reasonable care’ and contains reasons for the conclusion.

At this point it becomes extremely difficult for HMRC to overturn an ‘outside IR35’ determination at a tax tribunal. This would require the taxman to gather evidence persuasive enough to convince the judge that the original determination was wrong, despite the contractual paperwork and all parties providing evidence supporting the position.

Given the huge cost of litigating cases, which must still be done on a case-by-case basis, the taxman will likely only intervene where firms are clearly cutting corners with their compliance efforts. Chief among them will be firms that are overly reliant on insurance products and may appear to be insuring against deliberate non-payment of tax. Agencies are reminded that insurance offerings should underpin rigid compliance.

Evolving case law should provide clarity over status
Another impediment to any tax collecting efforts applied by HMRC is its reliance upon the Check Employment Status for Tax (CEST) tool. The use of CEST is encouraged by HMRC despite accusations that the tool is misaligned with employment status case law, which could pose further problems for the taxman.

Is this the end of ‘outside IR35’ engagements?
With the legislation so heavily geared towards pushing contractors onto payrolls, it’s easy to forget that operating ‘outside IR35’ is still a possibility – but the number of contractors operating this way has severely diminished. Admittedly, many of these individuals will not have been assessing their tax position correctly to begin with, and HMRC’s estimate of a third of the market is probably about right.

While many hiring firms and agencies understandably remain risk-averse, the dust will settle and businesses will soon recognise the Off-Payroll bogeyman for what it is. Once some begin to test the water by engaging limited company contractors, others will undoubtedly follow not least because the flexible workforce is the bedrock of UK plc and the UK economy.  Contractors provide vital skills on an ‘as needs’ basis and once the dust settles and businesses overcome the initial fear they have of Off-Payroll, they will turn to limited company contractors again as they recognise the practical and commercial benefits they bring.