One of the unforeseen consequences of forcing contractors out of their limited companies and onto the payroll is their fear of retrospective action from HMRC. While end-clients apparently assumed that contractors would have little choice but to comply with an inside IR35 status and non-negotiable terms, contractors’ mistrust of HMRC has thrown an additional spanner in the works of the off-payroll debacle.
Many contractors have said they won’t stand for being reclassified as inside the rules, which will see a considerable hike in their employment taxes without any of the advantages of being employed. Yet even if they’re not banking on going permanent or offshore for work, many contractors are planning on leaving their current contracts before April 6th, even if it means taking another inside IR35 assignment.
There’s a risk that reclassifying current contracts as inside IR35 will automatically lead HMRC to surmise that they always were. Contractor forums indicate that this is a real concern, with a recent survey showing that 91 per cent don’t trust HMRC not to start retrospective tax investigations if they continue their contracts under IR35. Their mistrust is based on previous experience of the government making back-dated claims against contractors, which has forced many into protracted appeals and subsequent bankruptcy.
Although the new Chancellor has this week promised that the government won’t be heavy handed in enforcing the new rules, there’s already some evidence to the contrary. Recent ‘fishing’ letters sent by HMRC to contractors at companies such as GKS saying that they owed tax have sent alarm waves through the sector. Similarly, hundreds of BBC presenters were targeted without any specific proof of non-compliancy. This has only encouraged companies to take drastic measures to protect themselves after April 6th when they’ll inherit the liability, with GKS being one of the first end-clients to adopt a ‘no PSC’ policy.
In the Policy Paper published on 22 Oct 19, HMRC stated that they will only use information resulting from the reforms to open a new enquiry into earlier years where they have “reason to suspect fraud or criminal behaviour.” This means there should be little risk of a retrospective investigation for contracts previously outside IR35 that have been reclassified as inside from April 6th.
The problem here is that anyone can have a ‘suspicion’, and if contractors can’t prove why they were previously deemed outside IR35, HMRC could claim that they had reason to suspect foul play. While HMRC might not conduct a targeted campaign to investigate retrospectively, if the situation conveniently presents itself, they're unlikely to ignore it.
For this reason, experts are advising contractors against signing extensions of their existing contracts, even if they agree to an inside IR35 determination. Wherever possible, a new contract should be signed to indicate a distinction between prior arrangements and working practices. Many end-clients simply want to reclassify contractors as employed for tax with minimum disruption or cost to themselves, yet it may not be in the end-client’s interest, especially where they’ve previously obligated contingent workers to work through their own limited companies, as was the case with the BBC.
In addition to negative publicity and a moral obligation to help contractors pay off their tax bills, the BBC has now got a ‘rep’ as a no-go-zone for self-employed talent, with the talent that does go there charging a premium for the risk. One positive aspect of IR35 reform is that it will force businesses to take responsibility for reviewing working practices that previously placed contractors at risk of non-compliance.
End-clients must understand that they can’t use contractors to save on employment costs, but also expect them to act like employees where it suits them. There are many terms written into contracts that require genuine contract workers to compromise their self-employed status. Contractors often know that these terms may blur the line with permanent staff, but may feel compelled to go along with them or risk losing the contract.
Equally, contractors wanting to stay outside IR35 should never accept the same perks and benefits of employees, such as holiday pay, company equipment, or a designated workspace. Outside contracts should never read like ‘job descriptions’ and should be more focused on project deliverables and outcomes, as with a Statement of Work document.
Contractors accepting inside determinations should, where possible, ensure that their new status is reflected in their contract to avoid the risk of retrospective action. This could involve negotiating new working arrangements and additional compensation / benefits.
Regardless of whether contracts are deemed inside or outside IR35, long-term viability of the supply chain will depend on the ability of contractors, agencies and end-clients to enter into realistic negotiations. End-clients will eventually understand that protecting their tax liability at the expense of being able to carry out their business operations doesn’t make sense. Until then, contractors are advised to ready themselves for reform.
This content has been supplied by IR35 Guru.
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