Disastrous legislative change may impact contractors and UK plc on the 6th of April 2020. This is if the proposals, made by Government and HMRC, go ahead to extend IR35 Off Payroll guidelines into the private sector. 2019 could be a key year in the history due to IR35 Off Payroll and one that could seriously affect the future of flexible working within the UK.
These new IR35 Off Payroll rules threaten to reduce the mobility of employees and access to key skills. Furthermore creating administrative and cost drains for those who need to assess and process income for contractors. The effects of this may leave an enormous dent on the contracting sector and UK industry as a whole. However, if the industry takes some form of action a more positive outcome could be secured.
IR35 Off Payroll impacts on contractors
The negative consequences of Off Payroll will affect all parts of the supply chain, however contractors are likely to feel it the hardest. Contractors face risks of extreme taxation from imprecise and ill-advised IR35 assessments by hiring firms. In the meantime, the rejection of tax relief on expenses will contribute towards the expected decrease in workforce mobility. This will push contractors to reassess the benefits and disadvantages of flexible working.
Those who decide to work ’inside IR35’ contracts won’t be compensated with the employment rights that their status permits. This is regardless of being considered ‘employed for tax purposes’. This could then be used as evidence in an employment tribunal. The Good Work Plan, a document set out by the UK Government which outlined their vision for the future of the UK labour market, was what prompted the possibility for an alignment of employment rights with tax.
IR35 Off Payroll impacts on businesses & agencies
The move to evaluate contractors as being outside of the rules would be tempting if it wasn’t hindered by the risk of HMRC action. With additional risk of potential backdated tax bills and penalties. This is a crippling outlook for any business, given the size of bills and penalties, and the added cost of a legal defence. This threat is likely to encourage a lot of companies to apply blanket bans on ‘outside IR35’ contracts. Businesses who take this path expect increased costs and struggles with recruiting as contractors increase their charges to counteract the tax increase. All of this while leaning towards recruiters that are prepared to be involved with contractors outside of IR35.
Furthermore, there are recruitment agencies that may need to start adding dispute resolution to their skillset. While the tax risk may discourage hirers from engaging contractors on an ‘outside IR35’ basis. Recruiters who try to misrepresent the status of an engagement to a contractor could risk losing them altogether. To avoid the supply chain completely collapsing, agencies must convince clients to work with contractors who are outside of IR35, where the working arrangement permits. This means assuming accountability for the associated tax risk.
The current anticipated format of the Off-Payroll rules causes an unfairly difficult scenario which affects the entire engagement process between agency, contractor and client. It is likely to become a highly turbulent situation which will need defusing on a regular basis. The good news is this isn’t yet a reality in the private sector.
IR35 Off Payroll: preparing for the worst-case scenario
If the IR35 Off Payroll proposals are legislated in their current format contractors, agencies and recruiters will need to be prepared to take steps towards decreasing their impact. Companies that disregard their compliance requirements, while rejecting to engage with contractors outside of IR35, risk a crash in recruitment from now until spring 2020. This is because contingent workers will simply find work with compliant firms instead.
Ridiculously, being compliant means accepting an inevitable tax risk. This just further shows how backward the proposals are deemed to be. However, the risk is worth the reward in terms of a continued access to vital skills. Businesses that plan ahead and put compliance practices in place will decrease their risk. All whilst making sure they remain attractive to prospective contractors.
Accurately evaluating the IR35 status of contingent workforces will be seen as the main obstacle. Furthermore for many it will be a deterrent from complying with the rules. Even so, it is a vital requirement, for which precise, automated solutions are available.
As well as firms and agencies, contractors entering into year-long contracts after April the 6th 2019 will need to take stock. With the priority to make sure their positions are clear and understood. Parties found by HMRC to be in a dubious engagement following April 2020 face substantial tax risk. Similarly, contractors who have been working long-term inside IR35 for a client may want to contemplate ending their engagement. This is simply to avoid attracting the HMRC’s attention and the danger of historic tax risk.