Stuart Gentle Publisher at Onrec

IR35: what is happening in the market?

Frances Lewis, consultant in the Workforce Solutions Sector at law firm Osborne Clarke

With IR35 reforms scheduled for April 2020, many end users, staffing companies and consultancy companies are now preparing themselves for the coming changes. What exactly are companies doing to ready themselves for these developments, and how effective will their preparations be? As April begins to draw closer, let’s look at how the market is reacting to the incoming IR35 reforms.

Moving to PAYE models?

Various larger banks have already announced that they will be implementing full PAYE policies before the new IR35 comes into effect. In doing so, they are essentially trying to avoid IR35 altogether; if all off-payroll workers are engaged on a PAYE basis there can be no legal claims around doing arguably unreasonable “blanket” assessments.

However, when this tactic was tried in the public sector in 2017, some organisations ultimately pulled back when they started losing talent to organisations that were prepared to allow contractors to operate “outside IR35” where appropriate. In the private sector could we see competitor banks and consultancies picking up IT talent from larger banks?

In some cases, these “all PAYE” policies may be driven by a more general desire to simplify arrangements in order to make supply chain checks easier, or to future-proof against further backlashes by any future government against the use of gig workers. Going forward, staffing companies and consultancies that wish to use PSCs will increasingly need to be able to prove in a reliable way how workers are paid, and that proper tax is paid.

Will end users be able to track all use of PSCs?

Some end users that have opted for full PAYE policies will likely allow exceptions where there is no budget for grossing-up pay rates, and where the contractors are essential to the relevant project. Meanwhile, many large end users are likely to be receiving services from consultancies who are themselves using PSCs. In other words, there may be PSCs in the supply chain come what may, and whether the end users realise it or not.

This seems to pose a real problem for some major users of PSCs. They can work out relatively easily where PSCs are directly engaged by them, or where staffing companies or Managed Service Providers supply them. But what about consultants supplied on day rates to support projects being delivered by large consultancies and the like? When is a consultancy project inside IR35 and when is it outside? How do the consultancies, systems integrators, and outsourcing companies engage their staff?

This area could cause some headaches, with possible tax assessments raised against some end users that did not realise they needed to do a Status Determination Statement (SDS).

Are umbrella PSLs a safe solution?

The answer to this is “maybe”. Many of the more sophisticated umbrellas have developed excellent payroll expertise and systems, but it all depends on how you structure your list. End users and staffing companies should avoid any connotation of “recommended” or “preferred” in light of various umbrella failures over the years. There are no prizes for guessing who the umbrella workers threaten to sue when this happens.

Ongoing spot checks will also need to be carried out on the umbrellas that are used. End users should expect to see much greater ongoing due diligence from staffing companies who use umbrellas. They will increasingly want real-time data about how and where people in their supply chain are being paid. Such checks and precautions are also advisable for the purposes of minimising risk under the Critical Finances Act for failure to prevent tax evasion.

One major concern is that, considering the Christianuyi MSC judgment earlier this year, several umbrellas may have substantial potential historic tax liability to pay at some stage. This would likely not be picked up by auditors, and could plausibly close the company down.

What about using one of the new IR35 status determination tools and services on the market?

Independent tools and services have come into the market to address the burden imposed on end users by the prospect of doing SDSs. Some of these tools are based on sound legal grounds and may be useful, but ultimately whether or not a test is effective depends on the reliability of the information entered and the suitability and range of the questions used to carry out the assessment. It is difficult to model what a court would consider when assessing whether an arrangement is one of employment or not. This is because the courts do not use a tick-box approach; they look at the arrangement as a whole.

Are any sectors in for a particular shock?

It will be interesting to see what happens in the construction sector. After the Agency Workers tax legislation was amended in 2014 it became unattractive to engage tradesmen and construction subcontractors as sole traders. Many moved to PSC models, the thinking being that, so long as some sort of CIS deduction was made, then there was no tax risk. But the new IR35 regime will apply even where CIS has been deducted, and this may be a big issue for the sector. According to the Office of National Statistics’ Labour Market Review, October 2019, a large proportion of the 4.9 million self-employed in the UK work in the construction sector. A large number of these will work via a PSC, so IR35 will likely have a significant impact.

What can contractors do if “forced” to work on a PAYE basis or inside IR35?

It is difficult to see how, under current and proposed legislation, contractors have a viable or commercially sensible claim in most cases. But that is not to say that complaints will not be raised or claims attempted, even if they are ultimately unsuccessful. Staffing companies and end users should therefore be taking steps now to minimise the risk of these very time-consuming and potentially destructive claims.

What will the long-term impact be?

In the past, increases in statutory charges in the staffing supply chain (which, for many, is effectively what this IR35 measure will be) have historically knocked pay rates and margins and volumes in the short term.

However, the received wisdom is that, over time, the market tends to adjust, especially for any contractors whose skills are relatively in short supply, such that take home pay and margins after two-to-four years are the same as they were before the change. Whether developments such as automation could usher in a new era where this historical trend no longer applies remains to be seen.

There is a lot of water to flow under the bridge before it becomes clear how sensible or effective the various strategies being adopted by end users and staffing companies are. On top of that, of course, there may be changes to the draft legislation. However, what is already clear is that careful planning, communications, and implementation of new contracts and arrangements all need to be in place in good time before the new rules take effect on 6th April next year.