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IR35 Reform: Why Recruiters/Clients Shouldn’t Make Blanket Decisions

IR35

A lot has been written already about potential IR35 reform in the private sector, and over the next few months we’re going to see more as the recruitment industry holds its collective breath. Whether it comes in April 2019 or waits another year, many believe reform is inevitable, and it’s likely to look very similar to the public sector reform of 2017.

How to Help your Clients Prepare for IR35 Reform: A Recruiter's Guide: click here to download >>

This means private-sector end-clients will be made responsible for assessing the IR35 status of any contractor they hire, and they’ll be liable if their decision is found to be incorrect.

Just as it was in the public sector, the apparently simple solution of making advance, blanket decisions will be tempting for many. By choosing the option with the least risk, and treating all contractors that way, hirers can negate the need for expensive and time-consuming new processes. There will be no need to acquire additional expertise, no inconvenient bottle-neck in the supply chain – what’s not to like, right?

Blanket “inside” IR35 decisions

In the public sector, 2017 saw many blanket “inside” decisions from risk-averse end clients who either didn’t want to follow the correct process or didn’t have the necessary expertise and resource available.

It caused them problems, there can be no doubt. The cost of hiring contractors in the public sector rose by an average of 10% according to government figures, and many projects were delayed or experienced staffing issues as a result of a widespread reluctance to accept public-sector contracts.

So why does treating contractors as “inside IR35” increase costs? There are two main reasons:

  • If the contractor is inside IR35, the hirer or “fee-payer” must pay employer’s national insurance. This is not due on payments made to contractors working outside IR35.
  • The contractor experiences a drop in their take-home pay as a result of being treated as inside IR35, and those in a position to bargain will expect an uplift to their rate to offset this.

In addition, the fee-payer must deduct PAYE tax and NICs before paying the contractor, which adds an additional layer of complexity and cost to invoicing and payroll processes.  

Difficult as they found it, in general public-sector bodies had an easier time than many in the private-sector would, without the luxury of government funding and surrounded by hungry competitors. It’s easy to imagine the disastrous consequences a blanket “inside IR35” decision could have on recruiters and clients alike, as they struggle to attract and retain quality workers with the skills they need.     

Blanket “outside” IR35 decisions

The obvious solution, then, would be to find all contractors to be “outside” IR35, wouldn’t it? Avoid the additional taxes, keep your contractors happy, and still avoid the extra work and cost involved in making IR35 assessments. It’s win-win, right?

Well maybe, in the very short term. The fact is that HMRC want more contractors to be inside IR35; they’re expecting this as a natural consequence of reform, and they’ll be specifically looking out for hirers making incorrect “outside” decisions. Deciding “outside” without completing an assessment will leave you without the necessary evidence to support your decision, which will make it a very risky strategy indeed.

So, what’s the answer?

Assuming reform takes the same shape as it did in the public sector, the only sensible response will be to assess IR35 status individually and correctly. That way, hirers can control the risks to their business by keeping their costs down and workers happy wherever possible, while still complying with the law.

It may also be possible, with enough notice and finesse, to adapt contracts and working practices to increase the likelihood of correct “outside” IR35 decisions so more contractors were legitimately working outside IR35. In this way, end clients could minimise both the compliance risk, and the costs associated with paying contractors inside IR35. Obviously, this is the preferred option for many, but it would mean acting now and in most cases, it would mean seeking the assistance of compliance experts.

IR35

 

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