IR35 Blanket Determinations
The Off-Payroll working rules from April 2020 have become a hot topic following a wave of decisions by major organisations to either curtail their use of contractors or force them to work “inside” IR35. “Inside” IR35 means that they pay income tax and employee national insurance (incurring between 20-25% extra costs), though they are not entitled to benefits such as sick pay, holiday pay or pensions.
The IR35 reforms were designed to stop disguised employment, not interim resourcing and many legitimate contractors should therefore naturally fall “outside” of IR35. As such the rules main aim is to make contracting more transparent and give organisations the impetus to review the way they engage their workforce.
Businesses who aren’t engaging with the new rules are going against the spirit of these reforms and against guidance from HMRC. When setting the status of a contractor HMRC has said ‘reasonable care’ must be taken - and it’s acknowledged that blanket determinations fail to demonstrate this.
Blanket determinations made in the public sector have been proven to severely restrict an organisation’s ability to deliver on projects and will eventually affect the ability of the country as a whole to react to market forces. If contractors are forced out of the market, our supply of talented individuals for interim work dries up.
Unfortunately, due to the highly publicised blanket determinations recently, companies who have yet to finish their IR35 preparations are beginning to feel less and less able to make status decisions and some are anxious about working with bona fide consultancies on interim projects. If large corporations are choosing to “opt-out”, other organisations that are potentially less prepared and with less resource are more likely to feel as though it’s the only option.
Why are blanket bans so bad?
When the reforms were first rolled out to the public sector in 2017 the NHS and other major services made blanket decisions which caused delays, increased costs and talent drain, resulting in major negative impacts to the services.
Additionally, there are three reasons that organisations should recognise blanket decisions as being dangerous, that are contained within the legislation itself:
- They do not constitute ‘reasonable care’ – and if they are found to have breached section 61T(6)(c), then the tax risk passes back up to that organisation.
- Insurance underwriters will not cover the tax risk unless an individual assessment has been conducted, and agencies do not wish to take on uninsured risk.
- If investigated by HMRC, an inadequate role-based blanket assessment could trigger a 2 year extension of the IR35 enquiry window to six years due to ‘carelessness’ under Section S36(1) TMA 1970. If the error was deliberate this could extend to 20 years (S36(1A)).
There will always be a need for flexible working practices. “Banning” contractors - or forcing them to become employed makes an organisation’s workforce and therefore their services less agile. Additionally, contractors often supply niche areas where there is a skills shortage - how will projects be completed if the skilled workers are either harder to engage or more expensive?
An Intelligent Alternative: IR35 Compliant Consultancy Solution
There is another way! Organisations can use existing skilled consultancy services to continue their programs, without having to allocate resources to the implementation of the IR35 reforms. In this model it is the consultancy’s responsibility to determine the IR35 status of its workers – as a client, the organisation is engaging specialist services, not specific people.
Nicolson Bray’s cyber security consultancy is a good example whereby clients are accessing skilled specialists in a manner that complies with the requirements of the IR35 reforms and actively manages any risks associated with them.
Our clients continue to benefit from the delivery of complex cyber security programs and scoped projects. We provide oversight to ensure that we deliver to expectations and our contracts ensure client protection from IR35 supply chain risk. Unlike larger, less specialised consultancies, our cyber security experts are always leaders in their field and we deliver programs at a similar cost to hiring contractors through recruitment agencies or managed service providers.
HMRC have made it clear that they will be looking very closely at companies post the IR35 reforms. For those with a high profile, large contractor base many of whom may fall “inside” IR35 it’s easy to see why they’ve felt at risk and made such sweeping blanket determinations.
To prevent this, we recommend taking a more pragmatic approach and review of working arrangements.
Organisations should engage with contractors and perform an audit now so that everyone agrees the next step. Then either undertake the status determinations themselves or consider a consultancy solution to ensure that projects needing specialist skills can continue, without the need to take on the IR35 status determination process.
To continue to be effective, organisations should be careful to avoid making blanket decisions in haste. Under the wording of the IR35 reforms, organisations should be carrying out individual IR35 status of their current and future contractor workforce. If this is not an attractive option, or if the perceived risk is too high, engaging a specialist consultancy is a compliant and flexible solution for supporting projects with niche skills.