A Recruiter Supplement: Guide to IR35 Legislation 2020 by Redactive Media Group

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GUIDE TO IR35 LEGISLATION 2020

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PEOPLE, PROCESSES,

PROTECTION How to turn IR35 into an opportunity

Enough has been said about the IR35 off-payroll private sector reform. Countless predictions and forecasts have been written but none of them change the fact that in a short number of weeks, it will impact all stakeholders in the contracting chain. Whether end client, agency or contractor, this change is very likely to hamstring growth and income if nothing is done to navigate the new rules. However, the changes also bring a huge opportunity. Savvy agencies (and their clients) will not just retain talent that operates through a personal services company (PSC) on their books – they could also win new business. Those with the right knowledge and resources will have a competitive edge over lessequipped recruiters. Workr Compliance has developed a three-pronged approach designed to keep agencies profitable and compliant. By prioritising these three Ps, you’ll protect your bottom line – and potentially grow it as well.

PEOPLE If you want to navigate the reform successfully, you need to know more about IR35 than what is changing. You need to understand case law and what IR35 compliance best practice looks like, and make sure everyone involved in managing your contractor books is clued up on an ongoing basis, as HMRC will likely start enforcing across the supply chain. Consultants that understand the IR35 off-payroll private sector reform will be in a much better position to educate clients – and ensure they make the right decision on how best to manage contractors

“Can you afford not to utilise the most robust and proven IR35 solution on the market?” 4 RECRUITER

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post-April. If you don’t, you risk losing contractor books altogether. Without knowing why a client is more inclined to bring all contractors under PAYE, you’re unlikely to be able to convince them otherwise. Nor will you be able to explain to a contractor how you can hope to establish and maintain a compliant IR35 status throughout their chosen career as a contractor freelancer. What’s more, it is imperative that all parties within the contractor supply chain understand and are capable of establishing status of roles. Without this knowledge, end clients are unable to pass with confidence ‘out of scope’ roles to their chosen agency – potentially restricting the amount of quality talent they can choose from. As a first priority, Workr Compliance helps agencies get up to speed. We have a team of IR35 experts here to demystify the legislation and proposed reforms for you. Their advice covers everything from the complications of blanket-banning to custom guidance on the nuances between each stakeholder in your supply chain.

PROCESS No one wants a significant upheaval at this stage. Wherever possible you should be attempting to maintain business as usual. In order to do this, your process of informing contractors and paying any subsequent tax (if misclassified) needs to be seamless. If not, you risk losing more talent than you bargained for – denting your income. Sadly, there isn’t enough time to manually assess each and every contractor on your books. Even if there was, the ongoing assessment process is so taxing that the consultant left in charge of assessing statuses will struggle to do so without risking a heavy number of inaccuracies. One proposed solution is the HMRC CEST tool. However, the free-to-use software has been heavily criticised for its unreasonably high standards and lack of consideration for Mutuality of Obligation. Specifically, most PSCs have had an issue

with the fact that HMRC has reversed decisions when disagreeing with CEST assessments. Thankfully, CEST isn’t the only option on the market. There are numerous, much more robust tools that have been developed by those on the frontline of contracting. That being said, at Workr Compliance, we believe it is otherwise impossible to be compliant unless using a blend of intuitive online assessment tools and a consultative approach. A blended approach ensures you can quickly process status assessments without cutting corners.

PROTECTION Perhaps the biggest reason why every recruiter hasn’t jumped at the opportunity that comes with the IR35 reform is the risk factor. The new rules put the onus of liability on the agency: as the fee payer, the buck primarily rests with you if HMRC did call your status assessment into question. However, HMRC has recently announced that should anyone in the chain attempt to ignore the incoming legislation reform, it will target all parties in order to retrieve owed funds. So be wary of any clients or candidates citing exploitable ‘loopholes’ – there are none. It’s for this reason that we work alongside Kingsbridge Contractor Insurance to give our agency network peace of mind when moving forward with contractor recruitment. A contractor favourite, Kingsbridge has designed its core offering in a way that covers all exposures and ensures agencies are protected should their contractor be misclassified. Kingsbridge Contractor Insurance has developed a unique and innovative insurance product to protect all parties in the recruitment supply chain (including contractors, ‘fee payers’, recruiters and end clients) against this new risk. The product can be purchased by anyone in the supply chain, not just the contractor and will cover defence costs and cover tax liability.

TAKE ACTION TODAY! With only weeks to go before IR35 takes effect, can you afford not to utilise the most robust and proven IR35 solution on the market? At Workr Compliance, we apply a genuine understanding of the intermediaries legislation in a commercial context. We’ll discuss how each contract assessment will impact clients and contractors and how you can mitigate the repercussions to keep all parties on side. We’re committed to giving agencies the upper hand, so apply our expertise to your negotiations today and contact the team at IR35support@ workrgroup.com WWW.RECRUITER.CO.UK 5

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IR35 LEG ISL ATION: KEEPING CONTR ACTORS

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IR35 LEG ISL ATION: KEEPING CONTR ACTORS

UPHILL BATTLE TO RETAIN CONTRACTORS How can recruiters keep their contractor talent in the wake of 6 April’s upcoming IR35 changes? Colin Cottell spoke to industry experts AS THE LONG-AWAITED DATE for the introduction of the controversial IR35 off-payroll rules into the private sector draws ever closer, recruiters face a battle to retain talent on their books, according to experts and those working in the contractor sector. On the assumption that the government sticks to its position that its promised review does not change the rules, they say that recruiters face an uphill task to avoid losing people on whom their businesses depend. And they warn of the risk of a brain drain as some of the UK’s highest skilled workers leave the country altogether. Louise Rayner, CEO of NumberMill, an accountancy practice that specialises in the contractor and ﬂexible labour market sector, says the root of the problem is that many contractors who previously worked through their own

PSC (personal service company) and paid themselves through dividends will be substantially worse off as a result of the changes. According to Rayner, this will hit these contractors hard. “It’s estimated that typically, somebody on £300 a day is going to be around £11k a year worse off; that’s a lot of money,” she says. As a result of the new rules, employers fearing they could be liable for unpaid tax and NI – should they incorrectly deem the worker to be outside IR35 – insist that workers, who previously operated through their own PSC, either go onto their

own payroll as PAYE workers or work via an umbrella.

CONTRACTOR WOES It is not surprising, therefore, that contractors – many of whom have been told by risk-averse employers that that they will only engage them if they are paid through PAYE – are unhappy, according to Dave Chaplin, CEO and founder of Contractor Calculator and IR35Shield. “They want to carry on working how they have been working, particularly if they have had their own assessments done for years and there is no problem; they will feel particularly aggrieved about how they are being treated.” Matt Fryer, head of legal

“It is estimated that typically, somebody on £300 a day is going to be around £11k a year worse off”

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IR35 LEG ISL ATION: KEEPING CONTR ACTORS

services at Brookson Group, says “the sting in the tail” of the new rules is that whereas before the employers’ NI could be funded from the agreed contract rate, from April, where someone is caught by IR35 this will no longer be allowed. “This presents an immediate 13.8% cost increase, which needs to be funded from the agency margin (which is unlikely), a rate increase by the client or a termination and renegotiation of the contract.” Chaplin says that in those circumstances recruiters face the tricky situation of not only being the harbinger of bad news to contractors, who are likely to feel aggrieved, but also having to work out how to keep them. Chaplin says that contractors who were previously outside IR35 and have now been told it is payroll only will have two main concerns. “The biggest concern is that if they carry on working for the same client, they are effectively admitting that they were always inside, which gives some historic tax risk for up to six years for any previous work done for that client, so they won’t be hanging around with that client,” he explains.

JUMPING SHIP The second concern is that if they remain with the same agency, HMRC’s RTI (real time information) system that agencies use to collate information on a monthly basis could trigger enquiries by HMRC as to why someone who used to run a limited company is now suddenly on the payroll. “The talk among 8 RECRUITER

“The only way you can manage the situation effectively is through clear communication, and giving contractors as much notice as possible” contractors is that they want to move to a different client and deﬁnitely move to a different agency as well, so they are sort of untraceable.” Crawford Temple, CEO of PRISM, a trade association for employment intermediaries and umbrella companies, agrees that some contractors will leave their existing agencies, however, he says it depends on their circumstances. “Some could well seek to move to try and protect their position, so that the Revenue doesn’t automatically come after

them. If the PSC is already closed or it has got no money in it, the worker isn’t going to worry too much, but if the PSC has got money in it, then there are a lot of reasons why they would leave.” NumberMill’s Rayner says that in addition to contractors jumping ship, often to another less compliant agency and looking for a job elsewhere, recruiters are also having to face up to the additional complications of contractors going directly to the end

client to negotiate their position personally. Some are having their own IR35 assessments done independently to persuade the end client that they are outside of IR35. If that doesn’t present recruiters and their end clients with enough difficulties, Chaplin says that some contractors are planning to remove themselves from the market completely. “Contractors are saying they are going to bench themselves at the end of February, and just

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IR35 LEG ISL ATION: KEEPING CONTR ACTORS

Advice Keeping your contractors happy and on board

➊ Contact your end clients to explain the changes and the effects on their existing contractor workforce

➋ Segment your contractor base into those that are most critical and valuable, both to you and your end clients, and those that you can ‘afford to lose’ ➌ Communicate with your contractors to find out which ones are prepared to accept being on the end client’s payroll, which will agree to work through an umbrella, and identify those who you are most likely to lose if the end client or hirer decides they are inside IR35

➍ Focus your efforts on see what happens. Lots of them have savings, so they can afford not to work for six months. They are sort of hoping things will get better so they might just take time off.” According to Temple, the April changes also risk ‘a brain drain’ of talent from the UK to other countries. “I think a number of contractors, particularly the higher-end contractors, will go abroad. They will have options to work across Europe or wherever,” he says.

these contractors by seeking to negotiate a new higher rate for them with the end client, or perhaps agree to share the pain by accepting a cut in your own margin

➎ Also consider having an independent IR35 determination made that may persuade the end client they are outside IR35.

➏ Where the above isn’t possible, refer contractors to a reputable and accredited umbrella

However, despite these challenges, Rayner says there are things recruiters can do to keep contractors on their books. The ﬁrst is to have a conversation with their end clients, who under the new rules are responsible for deciding whether a contractor is inside or outside IR35, she says. Although she accepts that this is likely to be a difficult conversation that could include asking the end client to compensate contractors now deemed to be caught by IR35 for the loss in their take-home income by increasing their rate. It may also result in the end client making a blanket assessment that all contractors are inside IR35. However, such a conversation is absolutely essential, she argues.

CRITICAL SKILLS One tactic that may prove more successful, Rayner says, is for recruiters to segment their contractor population according to how critical their skill set is, and how valuable they are to the agency. “You can’t do it for everyone, but the ones that are bringing you in lots of margin, or the highly critical ones, for them it might be worthwhile putting in more time and effort into getting an independent IR35 determination that they are outside, or getting a rate increase.” With the option of putting contractors on the agency’s own books as PAYE workers effectively ruled out because of the extra cost, which is greater than most agencies’ margin, Rayner says the only remaining option for the agency is to partner with an accredited umbrella.

“Negotiate a good deal for volume and a decent partnership relationship with the umbrella, and a decent management margin with the umbrella to get the best deal for the contractor. Then send a letter asking the contractor to contact the umbrella or expect to be contacted by the umbrella by a certain date.” “The only way you can manage the situation effectively is through clear communication, and giving contractors as much notice as possible,” agrees Temple, who says he is already getting contacted by unhappy contractors who haven’t been told anything about the changes by their agency or their end client. Indeed in many cases the contractor knows more about what is going on than either, he says. Although it may be inevitable that recruiters will face difficulties in retaining contractors on their books as result of the rule changes, particularly where employers introduce blanket policies as some of the banks have already done, Chaplin sees a glimmer of light. “I think we will probably see two rounds of quarter earnings from companies, and then they will start to see how much their costs have risen, and how projects aren’t getting done. And then they will realise that having a blanket policy of making everyone PAYE isn’t commercially viable for them,” he says. With the effects of April’s changes already beginning to bite, recruiters up and down the land will hope that Chaplin is right. ● WWW.RECRUITER.CO.UK 9

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IR35 LEG ISL ATION: BAT TLE FOR COMPLIANCE

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IR35 LEG ISL ATION: BAT TLE FOR COMPLIANCE

OPPORTUNITIES FOR AVOIDANCE With compliance rightly taking centre stage, what can recruiters and end clients do to ensure they aren’t penalised as a result of dubious schemes? Colin Cottell investigates AMONG THE DIRE WARNINGS about the disastrous consequences from the introduction of the long-awaited and controversial IR35 off-payroll rules into the private sector in April, compliance – or more accurately non-compliance – ranks right up there. In a letter sent to Chancellor Sajid Javid in late January, the Recruitment & Employment Confederation, along with the leaders of 14 of the country’s biggest staffing companies (among them Adecco, Reed, Adecco, Hays and Randstad), warned that pressing ahead with the changes in April is “creating huge opportunities for avoidance”. And they went on to say that the fact that the effective regulation of umbrella companies that had been promised by the government will not be in place in time for April was “their primary concern”.

With the call for a delay in bringing in April changes almost certain to fall on deaf ears, and a government review only looking at how the rules are implemented rather than changing the rules themselves, there is now widespread agreement across the contractor market that tax avoidance is set to rise and that those that provide opportunities to avoid tax have been given the green light.

CREATIVE SOLUTIONS Driven by dramatic falls in their take-home income estimated to average around 25%, limited company contractors suddenly caught by IR35 will ﬂock to sign up with service providers who promise to maintain their take-home pay or even enhance it, so the argument goes. And in turn, the changes which will apply to payments made to a

worker’s personal service company (PSC) from 6 April onwards will encourage an influx of less than reputable umbrellas and accountancy services firms, and other payment intermediaries, keen to offer ‘creative solutions’ to contractors, who aren’t either aware of the risks they face, or are blinded to those risks by their focus on the bottom line. “The market in these creative models to mitigate the financial impact of the off-payroll changes on

“Pressing ahead with the changes in April is creating huge opportunities for avoidance”

contractors has been growing following the off-payroll changes in the public sector in 2017,” says Matt Fryer, head of legal services at specialist accountancy services and umbrella solutions provider Brookson Group. “They are aggressively targeting their sales and advertising towards contractors and recruiters, who may feel it gives them a USP or commercial advantage over their more reputable competitors. And furthermore,” he continues, “it is becoming more and more difficult to spot these types of schemes as they often hide behind what looks like a compliant façade.” Graham Fisher, group CEO of Orange Genie Group, a PAYE umbrella company and accountancy services provider, says that with new rules coinciding with the

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IR35 LEG ISL ATION: BAT TLE FOR COMPLIANCE

start of the 2020-21 tax year, contractors face a cliff-edge type situation. With other organisations likely to follow some of the banks in insisting that all contractors are paid through PAYE, many contractors who are anticipating a new contract that maintains their current income are likely to be disappointed, he says.

According to Fisher, this will have consequences. He argues that you only have to look back at what happened when similar off-payroll rules were introduced in the public sector in 2017 to predict what is going to happen. “We had an explosion of umbrella companies that were just promoting

IR35 – A BRIEF HISTORY IR35 or the Intermediaries Legislation was first introduced in 2000 as HMRC’s attempt to crack down on alleged tax avoidance through ‘disguised employment’. The IR35 off-payroll rules apply if a worker provides services to a client through a personal services company (PSC) but would be classed as an employee if they were contracted directly with the client. Where a worker is caught by IR35 they are liable to be taxed and to pay NI in the same way as an employee. Under the off-payroll reforms, which have been in place in the public sector since 2017, the responsibility of deciding whether contractors are caught by the rules moves from the individual contractor to the end hirer.

avoidance schemes in order to preserve the take-home pay of contractors, and it will happen again.” But while a lot of attention has been focused on ‘dodgy’ umbrella companies, Fisher says the role of accountancy ﬁrms offering ‘aggressive schemes’ should not be ignored. Fisher says a feature of these ﬁrms

SMALL COMPANIES ARE EXEMPT The new rules will only apply to medium and large businesses in the private sector. These are defined as companies with a turnover of more than £10.2m, a balance sheet of more than £5.1m and 50 or more employees. Where the private sector client is considered ‘small’, the contractor will remain responsible for deciding whether they are inside or outside of IR35.

is that they don’t make proper IR35 assessments, telling contractors they are outside of IR35 when the reality is they aren’t. “This has been a problem for years and years, and that’s where the tax avoidance happens,” he says.

ON THE RISE Others familiar with the contractor market say that even ahead of the rule changes, the number of non-compliant service providers and schemes is already on the rise. “Yes, it is definitely increasing at the moment,” says Julia Kermode, CEO at the FCSA (Freelancer & Contractor Services Association). “A lot of clients in the financial services in particular are deciding not to engage PSCs anymore, and people need to be paid as if they’re inside IR35. So some agencies are then saying to their candidates. ‘Ok, well, you need to find an umbrella’. And if those candidates don’t know what a compliant umbrella looks like then they’re going to be WWW.RECRUITER.CO.UK 13

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IR35 LEG ISL ATION: BAT TLE FOR COMPLIANCE

Advice Why non-compliance with the IR35 off-payroll rules matters to recruiters and end clients The first reason is financial risk. While HMRC can go after individual contractors for unpaid taxes, where they are unable to recover this from the worker in certain circumstances it can go after the agency. And if that fails they can go after the end hirer. Under draft proposals published in January, HMRC will first seek to recover any unpaid tax liabilities from the agency the client contracts with, when this agency is UK-based. However, if HMRC is of the view that there is no realistic prospect of recovering the outstanding income tax from the agency, it will then seek to recover unpaid liabilities from the client. If the non-compliant solution involves paying the contractor’s limited company, then the HMRC debt can go all the way up the supply chain to the hirer. If the end client fails to take ‘reasonable care’ in making an SDS (Status Determination Statement) decision or fails to provide the agency with a decision, the client assumes the position of ‘fee-payer’. This would typically be held by a recruitment agency. However. in these circumstances, the end client and not the agency would be liable for any tax deemed unpaid as a result of that engagement. There are also Criminal Finance Act implications of failing to prevent tax evasion in supply chains. In additional to the financial risk, there is also the reputational risk to both recruiters and end clients of being involved in or associated with non- compliance with regulations designed to ensure that people don’t avoid tax. In addition, recruiters who get it wrong could find see their businesses damaged as clients no longer wish to be associated with them. Service providers that break the rules unfairly undercut those that operate compliantly.

attracted to those that will provide them, with say 80% of their income,” Kermode explains. Kermode says she is increasingly being contacted by contractors asking for advice about the difference between schemes that offer 80% or 90% take-home pay compared with compliant providers that pay 100% through payroll and deduct taxes and NI. Kermode says she has personally reported around 50 scheme providers that she believes to be non-compliant to HMRC. Although some recruiters, keen not to lose their contractors to rivals, might be tempted to work with providers offering such attractively high rates of take-home pay, Fryer says such temptation should be resisted. Among those risks are both ﬁnancial risk and reputational risk to both agencies and to their end clients (see box-out, left).

RED FLAGS According to Fryer, a number of red ﬂags should alert recruiters and help them avoid the risk of working with intermediaries who, while posing as compliant umbrellas, are actually providing ways to avoid tax. “They often

operate from outside the UK, pay contractors through loans or offshore funds, or take an aggressive approach to tax relief on travel & subsistence expenses for workers subject to supervision, direction or control. HMRC has been aware of these practices and have provided their view of this.” Kermode says that some non-compliant umbrellas will go to great extremes to appear compliant, even to the extent of providing fake payslips aimed at fooling both contractors and agencies. Fryer says the common giveaway is a website offering contractors a “too good to be true” percentage of take-home pay, often up to 90%. Matthew Brown, group CEO of giant Group, which provides umbrella and other specialist services to recruitment agencies, advises recruiters to be wary of scheme providers that are relatively new. However, he warns that it is often very difficult to detect any offshore element. “It is hidden behind the UK ‘front’,” he explains. Seb Maley, CEO of contractor tax advisory and IR35 specialist Qdos Contractor, agrees that “you don’t have to look far to ﬁnd companies advertising IR35 ‘solutions’ and speaking of ‘guarantees around IR35 compliance’...”. However, according to Maley many of the promises made by these ﬁrms are often too good to be true and unrealistic. And regardless of whether someone works inside or outside IR35, he says “claims that contractors can take home anything over WWW.RECRUITER.CO.UK 17

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IR35 LEG ISL ATION: BAT TLE FOR COMPLIANCE

85% of their earnings after tax compliantly simply isn’t doable”. According to Fryer, another type of payroll intermediary to avoid are those offering ‘fee-payer’ services, which overturn an end hirer’s accurate inside IR35 determination and make gross payment to the contractors PSC. “HMRC are aware of this as there was a boom in such services following the implementation of the off-payroll changes in the public sector, and are attempting to tackle it,” he says.

TARGET SECTORS ‘Aggressive’ and non-compliant schemes are operating across both the blue-collar and white-collar sectors, according to Kermode, although she says more are being targeted at professional contractors. “These are the one that are being told that they can’t work through their PSCs anymore,” she explains. Kieran Smith, CEO of Driver Require, a specialist driver agency that recently brought out a white paper on navigating the IR35 changes, agrees. “We believe that it is the white-collar community earning in excess of £40k per annum, such as IT

“A lot of people are complaining, but I see it as a genuine opportunity to level up the playing field” 18 RECRUITER

contractors or professional advisers and consultants, who will be more likely to receive approaches from disreputable umbrella scheme providers. “This is because this category of worker is less likely to receive a clear status determination from the CEST tool and therefore their status is more likely to be open to interpretation. At the same time they earn more so have more to gain from avoiding transition to a PAYE contract.” Smith says that so far, his company has not received any approaches from umbrella companies offering “rogue schemes” to get around the impending IR35 regulatory changes. However, Brown offers a different perspective. “At giant we have not seen them [tax-avoidance schemes] in the more mainstream markets such as IT, banking, ﬁnance and engineering. In markets such as these, where knowledge of tax compliance is quite high, engagement options are very much dictated by hirers and agencies, and typically hirers and agencies will have undertaken due diligence and look to those providers who have been independently assessed, like FCSA members.” Brown’s view aside, it is fair to say that from the perspective of compliance at least, the majority of those in operating in the contractor market, and including recruitment industry trade bodies and leaders, take the view that April’s changes will be damaging and a bad thing. However, despite his own view that tax avoidance

HOW MUCH MONEY ARE LIMITED COMPANY CONTRACTORS, DEEMED TO BE INSIDE IR35 AFTER 6 APRIL, LIKELY TO LOSE? According to a calculator tool on itcontracting.com,

a contractor who earns

£350 a day

and works five days a week, 44 weeks a year, will be around

£7.2k worse off

as a result of having to pay income tax and NI when compared to when working as a limited company contractor and paying themselves a salary of £12.5k and the rest in dividends.

Someone on a daily rate of

£500 will be around

£8,370 worse off

schemes are set to flourish as the 6 April deadline approaches, Fisher believes that the new IR35 off-payroll rules are in the longer run generally on the right lines. Unlike the old rules, where the responsibility for deciding whether a worker was inside or outside IR35 lay with the contractor, he argues that making the end user responsible for the decision, and ensuring that they can be held financially liable in certain circumstances for unpaid taxes if they get the decision wrong, will eventually drive out non-compliance from the supply chain. “I know a lot of people are complaining about how awful it is, but I personally see it as a genuine opportunity to level up the playing field. Once the penny drops, end clients will have to look after supply chain compliance.” Fisher says he gives it six months after the changes come in until that penny drops, explaining that employers, such as some of the banks who have told contractors that they can no longer work through a PSC, and who he predicts will lose top talent as a consequence, will be forced to think again. “That is the day end hirers will have to take control of the supply chain and the day that standards will start to go up, and they will ensure that where there is a PSC it is genuinely outside IR35.” In the context of changes that have been widely and fiercely opposed being likely to have precisely the opposite effect, only time will tell as to who turns out to be correct. ●

MARCH 2020

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IR35 ĊŪƫœđ ĉė Ƥķė ĉėƘƤ ƤķĻŞİ ƤŪ ķíƎƎėŞ ƤŪ ǋŪƫƑ ĉƫƘĻŞėƘƘ in 2020. No, really.

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