IR35 and the grey zone

You would think that IR35 and the public sector is old news but the only thing that is old news is that everyone in the public sector knows that IR35 exists and that they generally fall within it.

However, IR35 and its implementation is still shrouded in confusion with certain public sector bodies having made blanket rulings so that contractors automatically fell inside IR35 and others that outsourced large chunks of work to the private sector which thereby fell outside IR35.

The big play however for HMRC was always to roll out this legislation to the private sector. And now, we are only a few months away!

Alarmingly, way too many companies are totally unprepared or have only scratched the surface of how this huge change will impact them and their contract workforce. Plans need to be set in motion; understanding needs to cascade through organisations and someone or some people need to stand up and take responsibility before it is too late.

Those arguing about the legitimacy of the change (and I am in part, one of them) need to move on but those arguing about the validity of the CEST (Check Employment Status for Tax) tool and its implementation are absolutely right. The CEST tool does not work properly and does not cater for every scenario and only caters for black and white situations…and last time I checked our lives and working lives are anything but black and white and the life of a contractor is invariably firmly in the grey zone.

To avoid confusion, contractors should pay the right tax and HMRC is absolutely right that some contractors have not been doing this. And finding those contractors and getting them to pay their taxes is the right thing to do.

On the other side, contractors are not employees. They have no rights, they get no holiday pay or sick pay, no paid maternity or paternity leave, no pension, no medical, no bonuses so they are NOT employees, disguised or otherwise even if they do buy a cup of coffee from the staff canteen!

As a contractor, you need to make sure you are working with recruiters who understand the IR35 market and as clients, you need to start acting now so that you understand the changes, the impacts and the short, medium and long-term risks involved.

For those that think IR35 is something new, it’s not. It was introduced back in 1999. And it was HMRC that introduced the idea of PSCs (Personal Service Companies) soon after that.

And for years, individuals have contracted through their PSCs, paying themselves low salaries and high dividends and off-setting costs (travel, living, IT, employing their spouses) and all of this was perfectly legal…well mostly…so HMRC was looking for ways to bring in more money and decided to clamp down and tighten the interpretation of IR35.

One key change was making the fee payer (often the recruitment agency) responsible for any error in final determination and therefore forcing recruiters into an ugly corner. Many contractors in the public sector were forced, sometimes erroneously to work via umbrella companies and many contractors simply left the public sector or demanded rate increases.

There are often long contractual chains as well – end client to consulting firm to managed service provider to recruitment agency to contractor and quite often getting the right determination was close to impossible. This has improved over the last two years but it is far from clear as to why the determination was made the way it was or if it simply fell under a blanket ruling.

As mentioned above, certain public sector bodies have found work-arounds but what is absolutely certain is that there is still no certainty and no clarity and HMRC has lost several high-profile cases!

And what is even more confusing is that the decisions made in court have often been in direct conflict with the CEST test results.

Where does this leave the private sector?

Quite honestly, in a potential mess.

The CEST tool does not work properly or rather does not cover every eventuality.

There are several factors that come into play including SDC (Supervision, Direction and Control), Mutuality of Obligation, Right to Substitute, Hours of Work, the way in which the work is done and whether the service provider used their own skill, judgement and experience, the use of IT equipment, insurance and the onus on the service provider to correct work at their own cost.

But that’s not all, regularity of payment could become a factor and whether or not the contractor uses staff facilities or attends meetings or social events and whether or not they work for one client or several clients.

And then there’s the question that HMRC often asks which is what is the true nature of the relationship between service provider and the company requesting the services. And this is the greyest of the grey zones…because one way or another we could all have different opinions on this one question in particular.

I remember meeting a contractor many years ago and way before any of this was an issue and he categorically refused to attend any meetings, never ate in the staff canteen and though he always worked at least 8 hours a day, he never started at the same time on any working day.

The one relief is that when IR35 hits the private sector, it is the company looking for contract staff that will have to make the determination of whether a role or service falls inside or outside IR35 and they MUST pass that determination down the line and provide a Status Determination Statement (SDS), which explains how they arrived at their decision.

Six months to go and plenty of time to get ready but do start preparing now!

Things could change before April 2020 and no doubt there will be some last-minute scuttling around to get prepared, no doubt some mistakes will be made and no doubt HMRC will be fighting more cases in court, both winning and losing in equal measure.

With Brexit looming, carrying with it a potentially disastrous exodus of our European friends, with AI set to replace more and more people, IR35 changes couldn’t really be coming at a worse time!

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