IR35 – A Question from the IT Contractors – WHAT’S HAPPENING?
We now know that, whether we like it or not, the changes to the IR35 regulations are going ahead. We’ll almost certainly see these introduced as part of the Finance Act that follows the budget. This will mean that public sector contractors will be paying more in tax and see their incomes reduced.
That reduction might, in the short term, be quite drastic because, at the risk of sounding alarmist, there is a danger that as the changes are being rushed, some (many?) will have to go on to emergency tax codes as they become subject to PAYE. Yes, you do get a rebate once they have worked out what you should be paying, but it takes some time to come through.
What’s perhaps more serious is that the very people you would expect to keep contractors informed, namely the public sector organisations themselves (starting with the government/HMRC) are, regrettably in my view, either shirking their responsibilities or doing this piecemeal. To put it bluntly, the communication is not good enough.
It shouldn’t be like this. Firstly, it’s not too difficult to find out what the changes involve (and always remember, ignorance of the law is no excuse); secondly, as I, and others, have written elsewhere, the consequences do not seem to have been thoroughly thought through.
At the heart of this change is the online digital test (the Employment Status Service, or ESS* as it is now being called), which will determine whether a contractor falls into the IR35 net. Full details of this digital test were not available until very recently and consequently there was therefore huge uncertainty about what would be required to prove whether a contractor falls outside or inside the IR35 regs.
Essentially, if you are a public sector contractor the ESS test offers your best chance of maintaining the status quo – but only if you can demonstrate clearly and unequivocally that you do not fall into IR35. The principal dangers will be:
- for those whose public sector contractual work is done under supervision. They will find it very difficult to argue that they should be exempt and as a result will be forced to decide whether they want to continue in that position, with all that implies in relation to their future tax liability, or to seek an alternative.
- for those whose public sector contracting jobs are also being done by existing public sector employees. This is a grey area but my reading of it is that it if someone is sitting alongside a permanent employee doing the same job, it’s hard, if not impossible, for the contractor to claim that their work is as a ‘true’ temporary addition to the workforce and as a result they will be clobbered by the new changes.
- “no Substitution.” This applies where, for example, another contractor is brought in to cover (substitute for) an existing contractor who is on, say, holiday or secondment. If you, as the
In each of the cases above, the alternatives for those who fail the test could be to carry on but demand higher rates or to flee the scene and find a private sector berth where they are (in the meantime) immune from all this. Of course, the other major impact is on the hiring public sector body, which may have to treat the ‘contractor’ as a permanent member of staff (if sourced directly), with all that implies by way of additional NI, pension, etc. costs. The question I’d ask here is that surely it is fair to be considered an employee and enjoy those benefits if you get taxed as an employee?
The impact of all this is detailed in my earlier blog on our own website, but, in brief, it is likely that a lot of contractors may decide to head for the private sector. Before doing that, they must sort out their payment-end date before the current financial year end (something Be-IT will ensure for all those public sector contractors who work through us) and then they need to realise that the laws of supply and demand dictate that an increase in contractors wanting to work in the private sector will lead to static or indeed falling day rates there.
As for the public sector organisations, any decrease in the number of contractors working on time-critical and highly important government work means that work will be less likely to be completed on time and to the necessary standard. To ensure this doesn’t happen, they are going to have to increase their rates to retain contractors or pay even higher costs by utilising the body shopping facilities of the larger SI organisations.
However, even if not one contractor left their current public sector post, once the IR35 changes kick in many contractors are going to demand better rates to offset their increased tax burden. Either way, it will cost the public sector (more) money which they don’t have and there is a very real danger that vital digital transformation projects will stall.
Given that I’m not the only person to have expressed these concerns, it’s unsurprising that some public sector bodies are taking action to try to keep the project plates spinning. Anecdotally, I’ve heard that some UK government departments are already offering incentives to retain contractors. Politicians being politicians, I wouldn’t bet against a way being found to ‘smooth over’ the next 12 months for any major project that is currently dependent on highly skilled contractors.
Finally, if you are a contractor and you wish to continue to work under the current arrangements, you must ensure your position is legally sound. This is where the aforementioned ESS tool comes in. However, tests by industry experts on the initial beta version showed EVERYONE passing, even those whose work profiles clearly suggest they should fail.
HMRC launched the tool on 2nd March. It is a beta version. Unfortunately, subsequent investigation – and a plethora of incoming emails from companies keen to sell us their expertise in this area – has revealed that (to quote one of those emails, received on 3rd March, from Giant Group in London) “As this is a beta test phase, the tool may change. However, this will not affect the results you have already received. HMRC have confirmed they will stand by any results given by this version of the ESS (subject to the information entered being correct).”
This view is supported by another article, also on 3rd March, published on IT news site The Register. In this piece, several contractors who had tried the tool were quoted as saying that they only had to answer a few questions before they were ruled as being outwith the scope of IR35.
Furthermore, Dave Chaplin, the Chief Exec of the Contractor Calculator website, in an article on that site (again on 3rd March), said, “the live public version of the tool that HMRC released on 2 March 2017 is still failing to cover key areas of employment case law and is simply not fit-for-purpose. The tool states that ‘HMRC will stand by the result given unless a compliance check finds the information provided isn’t accurate’, which is no guarantee at all, because they just have to say ‘you are wrong’ and it doesn’t count for anything!”
This shouldn’t have been a surprise. Just a few days before this, on 28th February, the Contractor Calculator website quoted Martyn Valentine of IR35 specialists The Law Place (who helped examine the tool for the Contractor Calculator site). He said, “It appears at this stage to be nothing more than a survey, and not actually hooked up to any decision making engine. We put some terrible IR35 scenarios through the tool and everything passed. Something clearly isn’t right.”
In my opinion, something clearly isn’t right. But it’s now too late and a number of key public sector digital transformation projects might hit the buffers due to lack of suitable contractors. Given the emphasis in the Budget on the importance or STEM and technology generally this would be deeply ironic, but any subsequent demonstration of schadenfreude, whilst perhaps personally satisfying, would be of no great benefit to anyone, least of all the IT and computing industry people who are probably the ones who are going to have to find some way to clear up this mess.