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.
Conclusion
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!
The full report titled, ‘Intermediaries Legislation Qualitative Research’, can be found here
The one thing that has never been clear to me in 26 yrs as a contractor, is at what point in time T the overall cost of employing a contractor becomes
“The one thing that has never been clear to me in 26 yrs as a contractor, is at what point in time T the overall cost of employing a contractor becomes
Effing poor ADSL link (apologies for the mess in the postings) 🙁
After what time period T, for the purpose of tax / employee liability avoidance, does a contractor cost same/less as a permie doing the same job ??
To me, that is a major indicator of disguised employment from the client side. Old hands have seen the “permie-tractor” (and you wonder how that can be cost-effective) .
The “bum on seat” control etc means the client is a disguised employer, and the contractor should not be able to use dividends etc as a remuneration source for that assignment.
HMRC think they are missing out on tax here, but I suggest that another test should be that if the contractor is VAT registered and the end client is unable to reclaim VAT, eg financial services, then as there is no loss to HMRC IR35 and SDC should be disapplied.
If HMRC have 20%, plus the NI and tax paid by the contractor, they are quids in and would actually lose tax if the contractor were an employee. In these circumstances, the arrangements are clearly not tax driven.
This might seem silly, but we talk about IR35 solely related to the Contract/IT industry. My question is if an Artist (Don’t matter what type apart from the obvious) is commissioned (a contract) for a Local Authority does this fit into the new IR35?
[quote name=”Geoff”]HMRC think they are missing out on tax here.[/quote]
But this can only be for ltd companies using dividends instead of PAYE. Therefore it is simple for IR to do data analytics on the set of such companies to see what they are potentially losing if ALL these companies were disguised employees (or better – apply a multiplier as X% of those companies will not be disguised employees) .
Let’s see what they think they are missing out on, and whether it justifies the “class war” on a employment type that is increasing in number by the year.
[quote name=”The Q”]After what time period T, for the purpose of tax / employee liability avoidance, does a contractor cost same/less as a permie doing the same job ??
To me, that is a major indicator of disguised employment from the client side. Old hands have seen the “permie-tractor” (and you wonder how that can be cost-effective) .
The “bum on seat” control etc means the client is a disguised employer, and the contractor should not be able to use dividends etc as a remuneration source for that assignment.[/quote]
I’ve been working on a contract with my current client for 1.5 years. They are in the process of separating part of the business and it requires additional resource to cope with that load. Once separation is complete then the staffing numbers will reduce. This could go on for years more though, but the client couldn’t justify getting permanent members of staff in to do it as they would have to be made redundant afterwards.
So I don’t think you can set a time on it, it’s not that simple.
The considerations mentioned by Q are what hector would like it to boil down to, but I fail to see why their view should be government policy. Plainly, if the contractor is brought in to deal with a project of whatever duration, has no permie benefits and legal protections, and can be identified as a cost related to that project’s budget, they’re not an employee. A lot of firms deal with projects that may endure a number of years but which are outwith their BAU function, and that is precisely where contractors are most valuable. Hector cannot even evidence they are ‘protecting’ a paltry £400m pa (even lower now with the dividend tax), so how about we abolish it instead?
The Griff test:
As a contractor do you:
a) have you own e-mail address for your limited company?
b) Do you provide services for more than one client in a 12 month period?
c) can you tell a client to f*** off if they ask you to do things you are not being paid to do?
d) can you decide when and how you do the work you are being paid for (or least have a conversation about this)?
If the answer to any of the above is NO, then you are staff.
Simple. Easy. Fair.
For me the issue is that thru most of my career, I have been a “bum on seat” within a particular project. IR35 was actually the event that made me realise how I would like to work if possible (multiple concurrent clients etc) , but the client base was never gonna allow it.
If the client feels the cost of not defining things B2B if disguised employment is deemed to exist, they will soon change their tune on the work spec / working methods / payment terms to not be hit by the taxman.
The public sector more so.
The state is trying to encourage more fluid business/service models for personnel. Therefore their sector should be the ones doing the work to get the T+Cs defined for industry so neither they nor their suppliers are in a disguised employment scenario.
I appreciate that, but it’s irrelevant, IMO. Hector cannot even win cases using outdated, archaic definitions of “employment” that the courts rely upon, that are simply arcane oddities in a day and age when flexible arrangements are the rule of the day, even in what we still call “permanent employment”. I think the project-based definition is at least a better definition of determining a contractor, doing away with arbitrary cut off times or whimsical court interpretations, put forward by judges with extremely little exposure to the world of business.
Whether bum on seat or not, contractors don’t fit the permie model, don’t enjoy the same benefits or legal protections and are not viewed as the same thing by the end clients, however ignorant they might be of the particularities of IR35. Trying to shoehorn them in the employment box, simply because it “protects” an unproven (and no doubt incorrect) amount of “yield”, regardless of the harm this might do to business or contractors themselves, is insane. I am hoping with Osborne gone that we might see a rethink.
I understand why they’re targeting this so much at the public sector; because the Government is directly blamed for anything that happens within it, it is attempting to exert a semblance of control, but this may end up costing taxpayers far more in the long run. Their primary concern should be value for money, as arcane a concept as that might be to the public sector.
Remember, this legislation was intended to prevent the most blatant Fri-Mon scenarios, not be used as a tool to force freelancers into the “employment” model, with none of the benefits and all the downsides.
That said, it is reasonable to me, as much as I find the whole thing objectionable on moral and economic grounds, to at least move the burden to the so-called employer. Might make them re-consider what careless nonsense they blurt out in any interactions with hector (who will opportunistically utilise it, of course)… the danger is that it might make them overly risk averse, especially with the vague, catch-all SDC test. Luckily, this is being limited to the public sector for the foreseeable future.
[quote name=”Soprano”]
Whether bum on seat or not, contractors don’t fit the permie model, don’t enjoy the same benefits or legal protections and are not viewed as the same thing by the end clients[/quote]
But they are viewed as the same. For the day to day work.
That is the heart of the “bum on seat” mindset.
We don’t define/fix the precise work items for you on this project, because we mainly don’t even do it for our employees.
They’re not viewed the same, in my experience. You could make a case that they’re viewed on par with temps, at a stretch, although even temps get greater benefits and legal protections, and generally don’t offer the same skillset/experience, and don’t shoulder the same level of risk. However, how they are ‘viewed’ is irrelevant, except if you’re trying to trick the client into saying the wrong thing. This amount of silly subjectivity needs to be rooted out.
Also, where there is some deviation into areas like control, I think this is because the contractor themselves is ignorant of their function and don’t remind the client of it. It does involve a bit of self-assertion. It’s all down to individual perception. If they’re to retain the legislation, they can at least tie it to indicators that actually connect to the need for flexible, skilled consultant-like workers, and that is usually projects of a short term, finite (but not definite) nature. Measures like arbitrary time cutoffs and % of business with multiple clients have been tried in other jurisdictions, still have nothing to do with the intent behind engaging freelancers and inconvenience both engagers and freelancers, as they have diddly squat to do with the reason for the business engaging them.