As the clock ticks towards next April and the arrival of IR35 reform in the private sector, contractors are concerned about being wrongly placed inside the rules by their clients, who will become responsible for determining IR35 status.
We’ve been here before in the public sector. When similar measures were introduced in 2017, a number of organisations made blanket IR35 decisions, leaving contractors inside the legislation and taxed at a similar rate to employees. To an extent, these risk-averse IR35 assessments continue to be made even now. This has done little to reassure contractors that next year’s changes can be managed.
Contributing to contractors’ expectation that their clients will place them inside the rules is the controversy surrounding HMRC’s IR35 tool, CEST. The technology, which although it isn’t mandatory, is often criticised because it ignores key aspects of the IR35 legislation. This, along with the fact it was developed by HMRC itself, hasn’t done anything to win it the support of contractors.
In this climate of doubt about the accuracy and fairness of decisions that will be made, it’s important that medium and large businesses in the private sector take steps to set IR35 status accurately. They must be able to do this to protect their own interests because they will often carry the liability for wrong decisions.
Looking to the future, they also need to make well-informed IR35 decisions so they can continue attracting contractors, 1000 of whom recently told Qdos what they see as the key to setting status correctly.
Nearly half (48%) of contractors surveyed said an independent IR35 contract review is the essential element when ensuring accuracy. A big advantage of a contract review is that these are carried out by experts, who offer objective and unbiased advice – something that the parties with a strong financial interest in the outcome of an IR35 decision cannot claim.
The IR35 legislation is complex, and many different factors need to be carefully considered before deciding whether an individual provides a contract of service (inside IR35) or a contract for services (outside IR35). Understandably, independent workers want their tax status reviewed by a specialist with a strong grasp of the legislation.
Around one-quarter of contractors believe that the reasons for making a particular IR35 determination need to be passed along the supply chain – from the end-client to the recruitment agency and the contractor.
Contractors believe this transparency will lead to better-informed IR35 assessments, reached with joined-up thinking and input from all parties in the supply chain. They want to see a collaborative effort. This full disclosure would also put independent workers in a strong position to challenge what they might feel is an inaccurate decision.
Currently, in the public sector, contractors can request the reason for a particular decision, but there’s no obligation for the end-client to share this with every party in the supply chain up front. It’s very possible, however, that this transparency will be included in private sector reform. The recently closed IR35 consultation has already alluded to the possibility.
Independent workers have been left dismayed – albeit unsurprised – that HMRC has done little to hold their clients responsible for making risk-averse status decisions.
22% of contractors believe that by penalising clients for making blanket IR35 decisions, for example, these businesses are much more likely to set status accurately. To some extent, this deterrent is already in place in the public sector. The liability will transfer to the end-client (from the fee-payer) if it becomes apparent they haven’t taken ‘reasonable care’ when administering the rules. How much of a difference this has actually made, however, is up for debate.
A handful of contractors (6%) surveyed by Qdos think other methods lead to accuracy. The opinions in this group centre on education and the need for clients and recruitment agencies to have a better understanding of the rules.
With private sector IR35 reform now on the horizon, this insight should serve as food for thought for thousands of businesses, whose responsibility it will soon become to set the IR35 status of all contractors they work with.
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