IR35 Reforms and Total Brain Thinking
Total brain thinking. An HR director once likened the impact of an event or decision to a stone falling into a lake. Everyone considers the inner ripples, the saucers and dinner plates. The bicycle and tractor wheels, trampolines and beyond? Not necessarily so.
The UK economy has suffered turbulent waters of late. The torpedoes of Brexit obliterated by the tsunami that was the global pandemic. Lob in a frenzy of cyber-attacks from bored, locked-down hackers, and perhaps HR and compliance leaders and legal counsels could be forgiven for treating the IR35 reforms on 06 April 2021 as a tiny pebble in a lake of dystopian chaos. Hence many have taken the path of least resistance and risk in response. Or at least that’s what they’ve convinced themselves and their CEOs they’ve done.
Tens of thousands of contractors are being unnecessarily forced down PAYE routes by hasty decisions, possibly fuelled by less-than-impartial advice. A potential take-home pay reduction of 15-25%. Some clients are sailing close to the wind of HMRC’s intolerance of blanket policies. There’s also exponential growth in commercially available IR35 assessment tools, something of a lucky dip, given the result could depend upon which of them are used. What’s strange is an apparent apathy for the plight of the contractors themselves, many at least as committed to delivering for their clients as permanent employees are for employers. Is it acceptable for their livelihoods to be substantially impacted by sometimes little more than a coin toss? And why pay them less when you don’t have to? To what end?
Clients appear unaware of the damage they inflict upon themselves, perceiving the same rates for the same services. But they’re actually paying possibly 15-25% less, even though it’s costing them the same. Their money isn’t working as hard. And when paying for talent and effort, one often gets what one pays for. If their money isn't working hard...
The inner ripples driving these client decisions are the prospect of HMRC dispute, back tax, NI and penalties. And who cares if contractors are disenfranchised? They represent one percent of the fulltime UK workforce. Deal with it or shove it. But wait. For thousands of medium and large UK enterprises, contractors are part of the DNA of delivering results. Vital cogs in the machine. If you don’t believe one percent of DNA is important, consider that chimps share about 99% of their DNA with humans. And even a slightly worn cog in a machine can cause havoc.
With millions of workers furloughed and hundreds of thousands of contractors let go, change and transformation programs have been stalled or ditched. As companies pursue revival in uncertain economic times, the wider ripples of these decisions will have dire consequences for recovery. Losing out to competitors that do embrace outside IR35. A shrinking flexible resource pool. Talent drain from companies and the UK economy, as contractors seek work abroad, crippling UK change and transformation programs. The hassle of SDS disputes. The menace of employee rights claims from inside IR35 contractors. HMRC tribunals after all.
IR35 experts are sufficiently familiar with determination criteria to establish a set that will always pass muster. But once that’s in the public domain, the commercial value of assessment tools and services is potentially diminished. What most don’t realise is that a pre-defined path to a legitimate outside IR35 status is already in the public domain, provided by none other than HMRC.
Many IR35 experts will claim the widely misunderstood right of substitution cannot be relied upon to fuel an outside IR35 determination. HMRC apparently disagrees. They appear sufficiently convinced otherwise to deter clients from utilising it. Their Check Employment Status for Tax (CEST) assessment tool questions on the topic are arguably worded to incite the client to deny the right exists, even if it does. They have also dedicated a whole section of their Employment Status Manual to the task: https://www.gov.uk/hmrc-internal-manuals/employment-status-manual/esm8565.
Yet HMRC has honourably represented right of substitution in CEST. If your answers confirm an unfettered right of substitution, where the contractor would pay any substitute, then no matter how you answer any and all remaining questions, the verdict will be outside IR35. HMRC HAD to design it that way. A weight of case law precedent confirms an unfettered right of substitution, even if never used, can be and HAS been a sole determinant of outside IR35. What’s critical is that clients ensure contractors have the capability to execute a substitution where they would pay the substitute. If the right of substitution stretches this far beyond lines in a contract, even if never used, HMRC will go elsewhere in search of uncollected revenue.
What clients and British industry need and what they should demand is a set of known and exacting standards by which to engage their contractors outside IR35 with regulatory compliance and peace of mind. An inescapably firm foundation upon which clients and client managers and leaders can make value-based and not fear-fuelled decisions about how to engage contractors, is a bona fide right of substitution, coupled with a capability to execute. It’s probably the best insurance policy against HMRC even bothering to raise any dispute. And just like actual insurance, if you never use it, it doesn’t mean it isn’t valid.