IR35: The new challenges and how to handle them – part 5
In this guide from our IR35 expert, Paul Mason, we look at the new challenges self-employed contractors, end clients and fee payers are facing since the April 2021 changes to IR35 in the private sector, and how to navigate them.
In part 5 of this IR35 guide, we will cover:
• HMRC enquiry activity
• Off-payroll working
• Umbrella companies
• Conclusion: The contracting landscape in 2021
HMRC enquiry activity
HMRC compliance activity into the new (chapter 10) rules has commenced and we are aware that the focus has been on end clients, specifically in the oil and gas industry and the somewhat less defined banking and finance sector.
Assuming that HMRC follow the legislation, their first concern will be how robust the end client’s approach is to their decision-making responsibility under the private sector off-payroll rules.
We imagine the focus will be checking engagements where it was deemed that IR35 did not apply than those where the off-payroll rules were found to apply.
Even though HMRC are operating a ‘light touch’ compliance regime for the first 12 months i.e. no penalties which you can find out more about here, HMRC will still want that tax and National Insurance where it’s due.
In the policy paper, HMRC have also made it clear that they will still charge a penalty if ‘there’s evidence of deliberate non-compliance’ and so you do wonder whether those businesses which have not actually addressed the issue more than six months since the rules came in on April 6th 2021, might fall into the category of ‘deliberate non-compliance’.
There are several chapter 8 enquiries still ongoing, including some which have started in the 2021/22 tax year. They are into engagements pre 6th April, so HMRC stating that they won’t necessarily look back in time is not necessarily always the case.
Do you have to operate through an umbrella company?
You don’t necessarily have to operate through a umbrella company but if there are other alternatives, but if an end client decides that they are not engaging contractors through limited companies, then if a fixed term employment (FTE) contract or joining the company’s staff are not an option, contracting through an umbrella company may be the only course available to you if you wish to accept the engagement.
There appears to be the view that when someone is engaged through an umbrella company, the fact that PAYE and particularly Employers NICs (National Insurance contributions) are being deducted is somehow illegal. Whilst it’s illegal for an employer to pass on employment costs, you have to distinguish between the advertised day rate, which the end client will pay to a third party (an agency; or your company when the engagement is outside; or an umbrella company when it is not) and what you will receive as income. As an example, if an agency has agreed a day rate of £500, but this is an inside IR35 engagement, then that £500 per day will include the agency’s margin, potentially apprenticeship levy and most importantly, the Employer’s NI the agency must bear because you will be an employee (for tax purposes only) and be paid through the agency’s payroll.
Similarly, if there is an umbrella company in the chain, then the agency can pay the umbrella company gross (less the agency’s margin), but the umbrella will have all the costs referenced in the previous paragraph plus its own margin for its services. As long as its operating costs do not appear on your pay slip, then there are no illegal deductions. What is clear is that your gross income will not be £500 per day and your net certainly won’t be.
If your engagement does end up either being determined as inside or the only option is via PAYE (FTE/employment/umbrella), the best you can hope for is the ability to negotiate a rate increase, but even that has proved difficult. A survey undertaken by IR35 Shield at the start of 2021 suggested that only 16% of contractors had managed to increase their rates (1). The reality has been that many contractors have closed their limited companies down and taken full time employment or continued working through an umbrella. However, there is every chance that trading through a limited company could return.
We saw similar kneejerk reactions from clients following a change in legislation in 2013 which affected the engagement of the self-employed, namely, the introduction of the supervision, direction and control (SDC) rules. Suddenly nobody wanted to engage anybody who was self-employed. Yet, attitudes came back full circle when clients realised that you could sensibly engage the self-employed if you worked with the legislation.
The contracting landscape in 2021
It is true that we have a really unsettled picture at the minute, but those end clients who take the IR35 off-payroll rules seriously will benefit. These end clients will retain the best talent because self-employed professionals want to work independently and will seek engagements with end clients who approach the off-payroll rules on the basis of the genuine arrangements and not on the basis of avoiding any possible tax risk. Simply banning limited company contractors might be an easy short-term solution for the end client, but long term, it doesn’t work because the best talent will find work elsewhere.
In many sectors the damage has already been done but many end clients still haven’t come to those decisions. Hopefully as we move out of the COVID-19 pandemic, new opportunities will arise and end clients will realise that if they work with the legislation, they will benefit.
As a contractor, try and influence what you can, but ultimately you may have to accept taking work at a lower income rate in the short term in the hope and expectation that the market will rebound and operating genuinely as an independent contractor will become the norm. This is a tough time, but it doesn’t spell the end of limited company contracting.
Markel Direct offers a range of solutions for freelance contractors including Legal Expenses Insurance and an IR35 Contract Review service.
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