IR35 soft landing is nearly over: what should contractors do?
In recent months, two reports into the implementation of the IR35 tax reforms have been released: IFF HMRC Research Report 639 and the National Audit Office’s (NAO) own investigation. These have been met with two very different reactions by Kingsbridge’s Head of Tax, Andy Vessey:
“The IFF HMRC Research Report 639 reads like a white-wash; it just serves the government narrative, so we shouldn’t be surprised that it effectively says the IR35 tax reforms are justifiable. The ‘nothing to see here’ approach is in direct conflict with the experience we are hearing from others, which makes it hard to believe the report content.
“The independent National Audit Office investigation report is far more credible and takes a more objective view, appearing to have spoken to a broader selection of departments. I’m much more inclined to believe what it says. What is most interesting is the sheer volume of contradictions between this report and the IFF findings. These beg the question, ‘who did the IFF talk to?’. I feel certain that independent research (not commissioned by the government) into the effects of off-payroll rules (OPR) on the private sector over a similar period will paint a different picture.
“These reports are a wakeup call for any private sector organisation that hasn’t yet got its house in order, and the NAO report contains some important lessons.”
These contradictions include:
- The IFF downplaying the additional costs incurred by public bodies;
- The IFF suggesting that “engaging contractors via umbrella companies remained uncommon,” when the NAO report demonstrates that the use of umbrella companies has increased;
- The NAO report stating that hirers would need to make significant investment to meet their OPR obligations, while HMRC failed to consider the need to change systems, use of external advisers or the need to implement additional assurance processes;
- The IFF report failing to recognise that contractor rates have increased to accommodate the change, making it harder for some organisations to hire contractors;
- Regarding CEST, the NAO report reveals that the misunderstanding of right of substitution and financial risk were the most common errors in making status determinations due to HMRC’s lack of guidance in this area. Andy says, “The IFF report shows that around 50% of respondents did not seek information to ensure compliance with the OPR. Now either those organisations are extremely comfortable with the legislation and sufficiently competent or they are sleepwalking into a future IR35 maelstrom.”
Perhaps the biggest takeaway from the NAO report is that it reveals that HMRC did not confirm how it would interpret ‘reasonable care’ in respect of OPR failings.
According to Andy, “This explains why penalties have been difficult to stick thus far and where penalties have been levied they have been subsequently suspended. Furthermore, it also saves the potential embarrassment and costs of governmental departments appealing penalties in the tax tribunal and courts, albeit that HMRC believe such action would be highly unlikely. Future challenges are, however, more likely from private sector organisations.”
So far, we have been in a soft-landing period for the IR35 reforms to give contractors and their clients a chance to adjust. Now that the soft-landing period is due to end on the 6th April, HMRC will be pushing harder to apply penalties, which could mean more contractors finding their engagements under investigation.
What can contractors do now that the soft-landing period is ending?
Contractors need to make sure they are prepared for the soft-landing period ending so as to mitigate any lack-of-preparation by end clients and/or fee-payers. But since (most) contractors are no longer responsible for determining their own IR35 status, what can you do?
Talk to clients and fee payers
One of the simplest things a contractor can do is have a chat with their end client and/or fee payer to make sure they know the soft-landing period is ending and what this means. If you haven’t already had your Status Determination Statement (SDS) from your end client, chase it up and make sure everything is in order.
It’s also worth making sure you know exactly when you are still responsible for determining your own IR35 status so you don’t get caught out.
Make sure you’re confident with your IR35 status
As the NAO report points out, CEST is not exactly a clear-cut tool to use when determining IR35 status. If this is what you or your client are using to determine your status, we would suggest backing this up with a comprehensive hybrid tool such as the Kingsbridge IR35 Status Tool. Where this differs to other tools out there is that if your result is borderline or indeterminate, your case is handed to a human IR35 expert so they can manually review your answers and determine your status, giving you confidence that your IR35 status is correct.
Give yourself peace of mind with insurance
IR35 insurance is well worth adding to your suite of business insurances in order to protect you financially should you have to defend yourself in an IR35 investigation. Kingsbridge’s IR35 Protect has the added advantage of flexing to cover whoever holds the tax liability, be it you, your end client, or your recruiter. This also can help make you a more desirable hire as it removes much of the IR35 risk.
You can find out more by contacting our expert team. In the meantime, keep an eye out for the results of our IR35 survey, which was completed by contractors, recruiters and end clients to get a full picture of the current state of IR35, as these will be released very soon.