An Organisation for all
Accountants in Practice

Reforming IR35 

By Contractor Weekly

contractor weekly logo


End users want no responsibility for IR35

One of the options for reforming IR35 mentioned in last year’s discussion document was for engagers to take on more responsibility for ensuring that the right amount of employment taxes are paid. End clients would therefore take a more active role and would have to consider whether or not IR35 applied to the engagement.

If a contract was within IR35, the engager would then be required to deduct the correct amounts of income tax and NIC in the same way they would for permanent employees.

At the time there was little robust evidence on the whole process of how employers go about engaging contractors so HMRC commissioned research to understand the likely implications for engagers, should the rules change in the future. The research, which was carried out between September – November 2015, aimed to explore:

  • Awareness and understanding of the IR35 legislation by end clients;
  • Insights into engagers’ behaviours, processes and burdens when hiring contractors in contrast to taking on employees;
  • Impact of shifting responsibility on engagers should they become responsible for operating the rules; and
  • Barriers and incentives to compliance and non-compliance respectively.

During the course of the research 36 detailed interviews were held with government departments, public sector organisations, large businesses, small and medium-sized enterprises (SMEs), care and support businesses and recruitment agencies.

Main findings

Flexibility is the key benefit of using temporary staff

Although there were a number of reasons why organisations use temporary staff, most of these related to increased flexibility, specifically:

  • Saving money;
  • Reduced financial commitment and therefore lower risk to business;
  • Staff required for a particular project or task;
  • Managing seasonal fluctuations; and
  • Covering sickness or maternity leave

Extent to which temporary staff were used

The use of temporary staff varied amongst businesses but was viewed as being especially beneficial in some sectors, in particular construction, IT, consultancy and design. It was suggested that the nature of these organisations meant that there were lots of ‘project-type’ work where workers were needed for finite periods. It was also thought to be ‘in the nature’ of some other sectors to have lots of temporary staff.

SMEs on the other hand said they lacked a need for temporary workers and preferred to maintain control and put staff on the payroll to avoid non-compliance.

Processes for managing temporary staff

These varied across organisations in terms of how extensive, rigid or cohesive they were in checking tax status or the nature of the contract.

Public sector bodies that have been subject to strict rules for hiring contractors for the last four years, admitted that some do not follow these consistently. No surprise there as I have seen, first hand, the likes of DWP and HMRC themselves not adhering strictly to the IR35 assurance process.

Some organisations in the public and private sectors expressed a preference for dealing with PSCs as they were perceived to be less risky in terms of compliance. I would suggest that this is a typical attitude taken by many of those who use contractors, adequately demonstrated by two quotes included in the research document:

It mitigates the risk if engaging with limited companies, you are engaging with the company rather than the person” – Local authority

We don’t want to pay them and later find out we should have been paying them PAYE” – Large business

One public sector organisation said that “99 times out of 100” non-limited companies among their temporary staff were put onto the payroll.

A common assumption amongst engagers, that workers will deal with their own tax and that this is sufficient evidence of self-employment.

Awareness of the IR35 rules was, in the main, fairly high, albeit mixed. Those in government departments, large business or in finance roles tended to be more familiar with the legislation, although some participants had never heard of it at all.

General resistance to proposed responsibility shift

Unsurprisingly, engagers don’t want the responsibility of operating IR35 thrust upon them. There was a general cynicism regarding why this responsibility should shift and was seen as ‘another burden’ for organisations and that HMRC was ‘passing the buck’. Also, there was nothing in it for them!Specific issues raised included:

  • Administration – new systems would have to be introduced which would have time and cost implications.
  • Cost – the impact of potentially having more staff on the payroll as well as having to offer employee benefits.
  • Caution – in protecting their risk of exposure engagers would be likely to put more staff on the payroll and use fewer temporary workers, with jobs being resourced internally. PSCs would effectively be pushed into the role of an employee.

The issue of privacy was also raised ie, would contractors want an engager asking them lots of questions about their tax or employment circumstances?

What can be done to help?

Whilst HMRC information packs, online information, online training and seminars and a HMRC helpline would all be useful, a strong feeling existed that this change would be difficult regardless of whatever help is out there.

There was also a common held view that HMRC would fine organisations for getting it wrong.

Simpler test needed

The current status tests were considered to be ‘ambiguous’ and open to interpretation and, overall, organisations wanted a new, simpler test that brings greater certainty. This is not delivered by the Supervision, Direction or Control (SDC) test as there was an overall consensus that the test would catch the vast majority of temporary workers. In particular, when considering supervision, as most people will be supervised to some extent. As an alternative to SDC there were a number of proposals to measure employment status:

  • Duration – working for an engager for a long period of time e.g. for more than three months.
  • Intensity – working on a full time basis.
  • Exclusivity – working only for one engager.
  • Financial responsibility – contractors responsible for the consequences of their acts of negligence would be considered to be self-employed.

No prizes for guessing that businesses do not want the responsibility for IR35 parked on their doorstep. As well as it being costly, burdensome and constraining, it was also seen as undermining their business and their relationship with self-employed workers. Welcome to the world of the freelancer!