IR35 – they’re all caught! Risk analysis for agencies and hirers

Until the onset of the public sector IR35 rules, there was little tax or employment risk of dealing with a standard company contractor so long as the obvious tax avoidance models were avoided. Dealing with offshore companies, managed service companies, and self employment models, sometimes promoted by service providers willing to sail close to the wind, has for many years been a tricky sea to navigate!  Whilst the right advice has always been important, could life for agencies and hirers now be set to change for the worse, even if the Chancellor decides not to extend the tax to the private sector? Reading some recent reports around IR35 one could be forgiven for thinking it is, but is that view justified?

Let’s look at the position under the current public sector rules. If IR35 doesn’t apply because the relationship is outside, all well and good. But who decides on the status of the relationship, and what if they get it wrong? If IR35 does apply the end result is possible dispute, or more likely, payment of PAYE and NICs (including employer) by the fee payer, normally the agency or hirer, or referral to an umbrella company. In any circumstance adjustments will need to be made to the PSC contractor relationship, and pay rates. Could this lead to an increase in AWR and employment claims by disgruntled contractors receiving only net pay instead of gross company payments, as has been suggested? Are the public sector rules already driving these kinds of action?

[perfectpullquote align=”right” bordertop=”false” cite=”” link=”” color=”” class=”” size=””]There is little evidence that the public sector rules have invoked multiple claims[/perfectpullquote]

Contractors may feel upset at the change in the law but that feeling cannot change the law or legal entitlement. There is little evidence that the public sector rules have invoked multiple claims. The only case recently discussed in public is the Winchester case – alleged to prove that AWR claims could follow a finding of ‘caught by IR35’ – yet it creates no precedent, was settled out of court, and the facts simply mirrored a normal process where a public sector hirer had established that IR35 applied. The claim was stated to be under the AWR, but even if mistakes were made on assessing payment rates, the result would not have been because of the IR35 assessment but simply because someone got the figures wrong, as in any AWR case. Since 2011 there have been few AWR claims, so treat the hype with a large pinch of salt!

[perfectpullquote align=”left” bordertop=”false” cite=”” link=”” color=”” class=”” size=””]Be mindful of AWR and employment compliance[/perfectpullquote]

However agencies should always be mindful of the AWR rules and it is true that if fewer contractors work through PSCs but instead operate through umbrella companies or become PAYE paid workers, the risk of AWR infringements could well increase. The same may apply in the case of employment claims now that the charging of fees for Tribunal claims has gone and the blackmail effect is back (something our client the Association of Recruitment Consultancies has and continues to campaign on). On the other hand by retaining contractors operating through their own companies an agency will have the headache of resolving the rules.

It follows that these issues will apply to all agencies and hirers that use PSC contractors if the public sector rules are extended. [perfectpullquote align=”right” bordertop=”false” cite=”” link=”” color=”” class=”” size=””]the devil is in the detail so prepare early, and avoid the hype[/perfectpullquote] It is correct that some hirers could designate all contractors as caught, but private sector hirers will not be instructed by government as in the public sector. Some agencies may want to challenge blanket decisions, others may not. Whatever the policy following an extension the landscape will change for contractor supply businesses, so understanding the issues is key. Because the rules will inevitably result in greater risk for agencies and hirers, it is important to consider all options and have solid compliance processes in place.

As always the devil is in the detail so prepare early, and avoid the hype.

For more advice on IR35 and associated tax, agency or employment law and to discuss potential options, call Lawspeed on 01273 236236.

Lawspeed has advised agencies, hirers, service providers and contractors on contractor tax and supply related issues since 1997, and was the first organisation to produce acceptable IR35 friendly contracts and processes for recruitment businesses in 2000.