Private sector IR35 reform could be managed, but work must start now

Preparation is vital for better management of private sector off-payroll reform 

Talk of potential IR35 reform being extended to the private sector has been relentless recently, with many believing April’s changes in the public sector were merely a test before HMRC roll out similar measures to the private sector.

Unhelpful hints, the fact that HMRC remain adamant that public sector reform has been a success, and the lack of any moves from Government to head off these rumours leads us to believe that an announcement is on the cards. If the future of IR35 isn’t a subject covered in the Budget this month, then it is looking increasingly likely it will be a big topic of conversation in 2018.

We do not for one moment believe that further reform is necessary. Nor do we agree with the Government that contractors should be the focus of HMRC’s attention. In light of the Paradise Papers and allegations that huge businesses including Apple and a number of the UK’s wealthiest individuals are squirreling taxable income away in offshore havens, perhaps the Government would do better to scrutinise the tax dealings of others.

That said, we look to have reached a point where further IR35 reform seems somewhat inevitable. And if HMRC and the Government have made up their minds, which is the view of many industry experts, then now is the time to ready ourselves for potential changes.

With the strong possibility that recruitment agencies and private sector companies will soon be setting the employment status of hundreds of thousands, if not millions of contractors, it is absolutely essential they are prepared – for the sake of their own businesses and the UK’s growing independent workforce.

Recruitment agencies and private sector companies are understandably concerned about potential reform. Nevertheless, it could be managed. But we must learn from the mistakes made in the public sector, and use this as a road map for the private sector.

Agencies and engagers must take the initiative, and start an open dialogue with contractors. Speaking directly with contractors will help agencies and companies understand IR35 and therefore tax status. Should the changes be similar to those in the public sector, the end engager will carry the liability should they make incorrect IR35 decisions. It goes without saying that this could be an expensive, verging on financially disastrous mistake to make in the likelihood that HMRC decide to carry out an IR35 investigation.

Recruitment agencies themselves also have a responsibility not to simply push contractors down the route of working through an umbrella company out of ease and to protect their client’s liability.

While umbrella companies offer a viable option for contractors to work inside IR35 and take home marginally more than they might when operating through their own PSCs and under IR35, they should not be seen as the go-to.

Working through a PSC and outside IR35 is a remarkably more tax efficient way of operating, which gives contractors complete control of their finances. Contractors working outside IR35 and through their own limited companies will typically take home around 75 – 80% of their earnings, compared to 60 – 65% when operating through an umbrella.

Agencies and private sector companies must also have the right processes in place to make accurate IR35 decisions, and ones which allow them to continue attracting the best available contractor talent. It would be unwise to push contractors down one particular avenue out of pure convenience. In similar vain, blanket determinations would be hugely short-sighted, regardless of whether contractors are all being placed inside or outside IR35.

Given we all remain in the dark about the timescale in which potential changes would be enforced, the time to prepare is now. In addition to reaching out to contractors, recruitment agencies and private sector companies should consider talking to unbiased IR35 experts.

The sheer complexity of the IR35 legislation makes it difficult for potentially inexperienced agencies and companies to make employment decisions which can carry thousands in liability.

Recent APSCo research revealed that the majority (51%) of agencies do not believe public sector companies have access to the right tools or expertise needed to make well-informed employment decisions. It’s highly unlikely that the UK’s 5.5million private sector companies – many of which are small enterprises – have the in-house expertise to make calls accurately and regularly.

It’s why the view of an independent and unbiased specialist matters. In the likelihood that end engagers in the private sector will soon need to begin making these decisions on a large scale, it’s advisable to get an idea of contractors’ employment status from an expert to assist these decisions.

Despite fears, expected reform can be managed. It will however require a proactive approach from recruitment agencies and private sector companies. Regardless of when expected reform is announced and then enforced, the time to take action is now.