No sector has been unaffected by the pandemic, and the years 2020 and 2021 were tough for contractors, and those seeking the services of contractors have also suffered. On top of that, the Off-payroll legislation was finally introduced in April 2021. One year on, Dave Chaplin, CEO of compliance firm IR35 Shield describes the impact of IR35 and how human resources decisions will evolve to access the talent they need after a turbulent year.
Many firms that employed contractors were unprepared for the legislation introduced on 6th April 2021. They were discovering new ways of working in reaction to the pandemic, but they were also keen to avoid any consequences that might result if they breached IR35 rules. In particular, the larger firms interpreted the new legislation as a signal to stop using contractors altogether rather than risk getting the new rules wrong. Their decisions negatively impacted contractors and the firms themselves as projects came to a grinding halt.
A climate of fear
HMRC has the power to form an opinion that tax is due, leaving the onus on the taxpayer to provide proof that it is not and that requires the collation and presentation of compelling evidence. Those with tribunal experience will know that evidence is crucial to convincing a judge and discharging their burden of proof to win an appeal. Many firms take a risk-averse approach to tax to ensure they can avoid tax tribunals at any cost. But, as many firms are finding, the cost of putting all freelancers on payroll creates a barrier to hiring the best talent available.
The original Intermediaries Legislation enacted in 2000 was unworkable, and policymakers finally concluded that it was also unenforceable. So, the government introduced “IR35 reform” into the private sector, alongside a ‘soft landing.’ This concession was a non-statutory promise by HMRC that they would not charge additional penalties on top of tax bills in the first year, where companies had been negligent in getting their status determinations wrong.
The “soft landing” was primarily a lip service provision announced by the Conservatives after they were forced into promising a review of IR35 as they campaigned to win the last General Election. The concession was meaningless because, once firms have implemented a robust assessment regime, most firms can hardly be accused of carelessness anyway – especially in IR35, which is highly subjective.
Despite this, and trading on the ignorance of newbies to the IR35 world, this opened the doors for some “IR35 experts” to promote expensive services to help their clients demonstrate they had achieved a level necessary to meet “reasonable care.”
When it comes to reasonable care, there has been a conflation of the requirement to exercise reasonable care in coming to a conclusion in a Status Determination Statement and the concept of “carelessness” detailed in the Taxes Management Act of 1970. In my view, armed with scary words, some sellers persuaded firms they were at risk and needed to spend more money, but in reality, they didn’t have an issue. Remember that over the last 22 years since IR35 arrived, HMRC has not won a single carelessness argument on an IR35 matter in a tax tribunal.
What insurance is available?
Parliament has not yet put into law a statutory instrument to cater for tax offsets when unwinding an “outside IR35” position, should HMRC successfully overturn the status decision. The threat has created a disproportionate risk for hirers, contrary to the concept of fairness in the tax system. Oddly, we’ve gone from the old rules, where the worker had to pay the hirer’s National Insurance tax bill, to one where the hirer now has to pay the worker’s income tax and National Insurance bill – and the worker pays no tax at all. It does not make sense and is not just.
Despite multiple representations being made to HMRC for almost two years, this major flaw has been left in the Off-payroll legislation, highlighted by the Government’s National Audit Office (NAO) and confirmed by the Head of HMRC at the Public Accounts Committee on 21st February 2022.
Tax experts were surprised to discover that the client pays the total amount of tax, and the contractor gets a refund for any tax they have already paid. The outcome also means that any insurance policy bought by a contractor that purports to protect other parties in the supply chain does not work.
According to the Association of British Insurers, you can only buy insurance for something or someone you have an insurable interest. Hence, contractors who have purchased an insurance policy that purports to protect other parties in the supply chain are invalid because there is no insurable interest at all.
The future of umbrella companies and the shape of IR35 to come
Under the new legislation, many contractors have been given no option other than to work through an unregulated umbrella company. Some unscrupulous providers have taken the opportunity to retain or delay entitlements such as holiday pay or indulge in dubious practices that do not benefit the contractor. HMRC has already called for evidence on the umbrella sector, and further regulation is likely. There is a place in the market for umbrellas, but workers and HMRC must get the monies due, and workers should not have an umbrella forced on them to get work.
Meanwhile, many freelancers have left contracting or have found work for small consultancies or clients overseas where IR35 is irrelevant. Small niche consultancies are likely to grow and steal market share from recruiters. Some recruiters are trying to set up consultancy arms, and HMRC is aware of this trend – already, HMRC’s compliance checks ask questions about “fully contracted-out” service providers.
Fortunately, many firms are now getting to grips with the new legislation and are starting to hire contractors with confidence. As a result, their HR departments will be able to look wider for the sources of talent on which their firms depend.
