Updated: Aug 21, 2020
With a Global Pandemic devastating the world, the proposed changes to the rules on IR35, which was due to come into play on April 4th 2020, almost feels like a lifetime ago now. This, along with a last-minute decision to delay it for 12 months feels like a distant memory.
In recent months we have seen companies across the UK focusing primarily on staying afloat, seen many contractors out of work and left wondering where their next project is going to come from. With the very real risk of a second wave of COVID-19 hanging over us it’s almost hard to remember how much of a disruptive impact the proposed IR35 changes were going to have on our gig economy culture.
I myself, along with many others, am guilty of almost believing that in amongst this crazy mess we call 2020, it would somehow disappear… even at least for a few years. However, much to my disappointment it’s become apparent there is no such joy. A motion was brought to parliament on July 1st 2020 to amend the finance bill and delay the changes to IR35 until at least 2023. However, democracy has spoken. MPs voted against the motion and it has now become a stark reality that the changes will take place as planned on April 4th 2021. IR35 has not gone away, it is happening!
Being honest, I wouldn’t expect anything less, with UK’s budget deficit skyrocketing into the red and set to reach unprecedented levels which we haven’t experienced since the end of the Second World War, and with still no clear end to this virus with no vaccine in sight, the government have been rendered absolutely skint. It is only logical that their priority is going to be recouping money from wherever, however and whoever they can. The scheduled changes to IR35 offer a great opportunity for them to legitimately investigate any UK based company and potentially hit them with a whopping tax bill.
My first reaction to this somewhat damming news was why? Why are the government operating in such a manner that has a negative impact on our Contract & Temp workers being able to work? People operating through a PSC still actively contribute to the economy both through the work they deliver and the taxes they pay on their income. In a climate where unemployment is rife; jobs are few and far between; project work is scarce, why create a situation which adds significant hindrance to gig economy workforce from generating an income?
If a business will no longer work with someone operating through a PSC and that person cannot secure a permanent job then surely this just adds another number to the UKs already spiralling unemployment figures? As a result, this person is no longer contributing to the UK economy; are in a position where they have to claim state backed unemployment support which costs further money thus achieving the exact opposite outcome the government needs right now.
I then started to look at the bigger picture. Firstly, what is IR35 and how long has it been around? It hasn’t just appeared out of thin air Like COVID-19, nor is it invisible to us.
IR35 is not a new ‘kid on the block’. It’s been around for decades, introduced by Gordon Brown’s Government in 2000, as an anti-tax avoidance guideline that applies to all contractors and freelancers who do not fall under HM Revenue & Customs definition of being self-employed.
So, what’s changed? In 20 years, quite frankly, not a lot. The rules around determining a contract engagement to fall inside or outside IR35, although not ever entirely being a clear black and white, haven’t changed.
The pending proposed change has nothing to do with the rules on determination whatsoever, it’s a change of responsibility to whom determines and declares the IR35 status of a contract.
Up until now in the private sector it has always been the responsibility of the contractor operating through a PSC to make the determination of IR35 status. If for whatever reason the HMRC disagreed with this, the individual would be liable to foot the tax bill for the arrears owed, based on an outside determination being found to be inside.
As of April 2021, the determination responsibility, along with liability, will be passed from the PSC to the fee payer who will now hold all responsibility of ensuring they review, determine and evidence each PSC operating within their business.
So why is this one small change causing such a wave of disruption across the gig economy market? Surely every PSC who declared and is operating outside IR35 will still be operating in the same manner as before, so why the issue?
In my opinion the issues stem from lack a of education and knowledge on IR35, a term which until very recently most companies wouldn’t have even heard of, let alone hold an understanding.
When we have little, or no information on something, we tend to look at the risk as our primary driver. So now that companies and their employees are tasked with managing IR35 changes, they are confronted with a sudden risk of being hit with a tax bill. As a result, they typically push the panic button and “play it safe” with an inside determination without really considering the wider implications of doing so.
We saw a similar response back in 2017 when IR35 was rolled out to the public sector in which many organisations across the NHS and Government saw that the easiest risk averse solution to the changes was the blanket “opt everyone inside IR35” without any investigation or proper determination.
Of course this was met with massive criticism as many PSCs who had been delivering work for the NHS and were clearly operating outside IR35 were suddenly uprooted. They either had to accept that tax had to paid in line with the rules around inside IR35 workers, which meant for most wiping out the majority of their profits, or for the lucky few where the client agreed to pay the additional tax at source it meant a greater bill for the already stretched public sector and even more money being spent unnecessarily.
This disruption forced the government to update the legislation around using reasonable care in which for every determination made, the client would also have to produce a Status Determination Statement (SDS) to evidence they had reviewed each specific contract engagement formally to determined its IR35 status against appropriate guidelines.
In theory this should massively help the legislation be applied fairly and any contractor truly operating outside IR35, who is not doing anything untoward or breaking any rules, could continue to operate as such.
Unfortunately, in practice this hasn’t been the case. The practicalities of a company suddenly being able to adopt and comply with these responsibilities is both costly and time consuming. The added issues of IR35 historically being somewhat a grey area and the pending risk of companies being liable for many tax bills linked to a miss determination makes it completely unappealing.
Therefore, many companies have adopted a different way of mitigating their risk.
We have seen many organisations put a blanket ban on all contractors operating through a PSC; such as several banks doing so as early as 1st January 2020. I have also seen many businesses, who were regularly engaging with PSCs prior to April 2020, give contractors an ultimatum to either work through an Umbrella, take a permanent position or their contract be terminated. Both options are unappealing, and somewhat insulting, to an individual who has based their entire career on operating a PSC and worked tirelessly to build its reputation.
The frustration to all of this reverts to the fact that if these contractors were operating outside IR35 prior to the changes, then they are still operating outside IR35 post the changes as the legislation has not changed!
So the issue with this whole situation is not the change in responsibility, but the lack of education around the changes, caused by poor communication from HMRC, and the negative connotations adopted surrounding the legislation.
Businesses need to be educated that this legislation was not designed by the government to stamp out PSCs operating outside IR35. It was simply designed to stop the rules being abused by those operating unfairly. If a company carries out a review on a contract and it is clearly found to be operating inside IR35 then they probably shouldn’t be working through a PSC, but in reality for the large part, those who have operated a PSC for many years and traded through it declaring themselves outside
IR35 are doing so lawfully. The risk would have been on them before so would it really be worth them risking their livelihood and a huge tax bill!?
So as opposed to spending the next 8 months spitting feathers about IR35, or simply burying my head in the sand until next March and then panicking at the last minute, I want to use my time effectively. I want to ensure that every client I work with is educated properly on IR35, letting them know exactly what it means for their organisation and the PSC’s they are working with.
The rest of 2020 is vital for promoting the message that the changes to IR35 does not mean you need to stop working with PSCs, but in fact they can still operate in exactly the same manner they always have done falling in line with the guidelines surrounding IR35.
No major change is required to how your business operates, you simply need to ensure you assess and document an SDS for each contract to ensure they comply with the three main areas of Control, Mutuality of Obligation & Substitution.
In the lead up to April 2020 I led a project across my business in which we independently reviewed contracts across all the individuals operating through a PSC and found that only one, YES JUST ONE, of our contractors was operating inside
IR35, the rest were all clearly outside IR35.
The main purpose of this exercise was to not only certify we fulfilled our duty as the fee payer in line with the new rules, but also to ensure our clients and contractors were correctly educated on IR35. What it meant for them was we had taken the appropriate steps to safeguard all parties in the chain and everybody could continue to operate in the same way under new legislation.
This dramatically reduced the number of clients we worked with from pushing the panic button and enforcing a blanket ban on PSCs, which in turn kept contractors in work and the projects these businesses had in motion, were fulfilled to completion without being uprooted.
As standard process with every new client engagement, we review the IR35 determination at qualification stage and upon completion.
I strongly believe that the sooner we accept IR35 is here to stay and recognise the changes do not mean the end of the contract market as we know it as long as the right process is put in place, then the disruption can be kept at a minimal in an already shaky global economy. With this in mind the gig economy will not only continue to survive, but thrive.