Not every contract assignment should be determined as Inside IR35
Please note: this blog was written before the IR35 implementation date was delayed to April 2021, however the information contained in this blog is still relevant and helpful.
This is an important message to any end client who is considering making blanket IR35 determinations.
Whilst auditing the contractors who supply your business via a limited company, ample consideration should take place in order to determine IR35 status under the Off Payroll Working rules. It is imperative that you do not simply classify all contractors as ‘Inside’ IR35. Not only is it illegal, but it will also not likely be an accurate reflection on the actual status that should be applied and is also not treating each assignment individually, as you should do in line with the legislation by taking reasonable care.
It has been clearly communicated since the Public Sector reform in 2017 that reasonable care must be taken by the end client when making an IR35 determination. To do this, end clients should assess each assignment on a case by case basis and not make blanket, or business wide decisions.
There are likely to be a number of serious consequences for businesses who take this approach which we outline below. This is taken from our experience and industry wide experience of the reform to the rules in the public sector.
Contractors may terminate their agreements and leave
If contractors supplying services in an Outside IR35 capacity (and who have been doing so for some time) are told that the end client has made a final decision opposing their Outside position, it’s highly likely that due to this incorrect classification they will terminate their contract and look elsewhere. The contractor will look for an assignment which is correctly determined as Outside IR35 with another end client.
“Why would you want to make a decision that means your contractors leave the business?”
Contractors may request a higher rate to continue the assignment
If the status has been incorrectly determined by the client and the contractor is forced to operate Inside IR35 and has decided not to leave, the Fee Payer (usually the agency) will have to make tax and National Insurance deductions before paying the limited company. The result of this will be a lower net retention to the limited company. To offset that, they may choose to increase the charge rate. This means the cost for the client to procure the same services from the same limited company contractor will increase. Factor in where agencies are working on a fixed percentage margin, the cost below the agency in the supply chain increases, the monetary value of the margin increases as does the overall charge rate to the client.
“Why would you want to unnecessarily pay more for the same service?”
Surely it can’t get any worse?
These are the first two things which may happen where an end client has made a blanket determination. Some will leave and some will increase rates. Now let’s look at how the end client can handle these elements.
The contractors who have terminated and moved on were most likely working on critical projects or supplying skills that aren’t available within the business (hence why their services were procured in the first place), and the business will need to replace them.
Ordinarily this wouldn’t be such a difficult task. However, the end client has now taken a stance where they will only engage on contracts where the assignment will be determined as Inside IR35.
This means the talent pool of highly skilled contractors who they are looking to engage will not be interested in providing services to the client; they will be taking assignments with clients who have taken a considered, pragmatic approach to the Off Payroll reform.
Available to the client now is a reduced pool of resources, who may not be as highly skilled as the ones previously engaged with. The time it will take to engage a new worker with these limitations will also increase and when the client does find a replacement, it’s likely that the charge will have increased as well.
This increase in cost shouldn’t only be viewed as a financial one though. You will have to look at budgets, there will be an increase in the price of the services being delivered and you will need to pay more for the same result, but there is also the cost of time to consider. The unnecessary disruption this will have on critical projects will have an impact as well. One project being delayed usually results in a knock on effect where others are delayed; external vendors may be pushed back or projects running in parallel that are dependent on this one could also be impacted. In a worst case scenario it may even have an external effect on the end client’s customer or products. In a world where customer experience is at the forefront of business strategy, this is not something you want to negatively impact, especially if it can be easily avoided.
“Why would you make an unnecessary decision which has a detrimental effect on financial, time and customer experience factors?”
Don’t force contractors into a new model
Another big mistake frequently seen is contractors not being given options; even worse when following an incorrect blanket determination. Nobody likes to be forced into a decision without feeling like it’s a decision they can make after reviewing a series of options. This isn’t just linked to incorrect determinations though, this applies to correctly made determinations as well.
The reform is going to limit the options people have but there should be a number of options available for a contractor to make an informed decision on how they proceed. Clients forcing contractors to use an umbrella company after making an Inside IR35 determination on the assignment is not helpful. It’s highly likely that if they have been working Outside IR35, the next assignment they move on to will also be determined as Outside as well. So, if for a short period they do decide to stay and work Inside IR35 with you, they may want to continue to use their limited company; this means you will need to have a ‘deemed payment’ solution available or work with a supplier who can facilitate this method of engagement and payment.
“Why would you choose to force the remaining highly skilled, highly valuable flexible workforce into a model they don’t want to use”?
It is important as an end client not to make incorrect determinations. Managing this change with a considered approach is vital to everyone in the supply chain. The contractors supplying services through their Limited Company add significant value and the IR35 decision making process should be a fair one.
If you need help on the best way to handle this reform, please contact us below and we will be happy to help. Huxley is part of the SThree group of companies and you can also view our suite of resources here.
This document/article is for information purposes only, and should not be seen as providing legal or tax advice. SThree and its family of brands, advises clients and contractors to seek independent legal and/or tax advice, where required.