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How Off-Payroll toxifies relationships between business, agencies and the self-employed

Not only are the Off-Payroll rules an overly-burdensome and unjust amendment to IR35, they also have a toxic impact on the previously amicable relationship between businesses, agencies and the self-employed. What HMRC introduced in a wanton effort to increase IR35’s tax yield threatens to destroy the supply chain dynamic and considerably damage flexible working in the UK.

A real-life realisation of Karpman’s drama triangle, Off-Payroll pits contractors, clients and agencies against each other. By giving clients and agencies compliance obligations, and a significant degree of risk, the taxman has manipulated IR35 so that, rather than do right by the contractor, these parties are more inclined to act in their own best interests by breaking the law.

This conflict of interests also happens to provide the outcome which generates the greatest tax yield – undoubtedly HMRC’s intention. However, the unintended consequence of exploiting contractors in this manner is yet to be fully felt.

What is Karpman’s drama triangle?

The drama triangle is a social model used to help understand the destructive interaction that occurs between parties in conflict. Used in psychotherapy and dispute resolution, the model works by helping those affected identify their status as one of three personas within the conflict: victim, persecutor or rescuer.

In practice, these personas are only intended to reflect the attitude that the individual adopts i.e. the victim feels victimised, though that may not necessarily be the case. Acknowledgement of each individual role undertaken is supposed to initiate the resolution process.

Unfortunately, as long as the Off-Payroll legislation continues to enable and encourage parties to persecute each other, mere acknowledgement of one’s own role won’t resolve anything, making this the mother of all drama triangles.

How Off-Payroll enables exploitation by clients

The client is the persecutor – partly by default as a result of the legislation, but also somewhat due to its own willing decisions, as the public sector has demonstrated.

Clients have unwanted skin in the game. They are reluctantly responsible for assessing the IR35 status of their contractors, and face the looming threat of substantial tax and penalties if HMRC challenges an ‘outside IR35’ assessment.

Deeming the tax risk as outweighing the reward of continued flexible access to key skills, clients have persecuted contractors by refusing to engage them outside of IR35, even where there is a clear contract for services.

In the public sector, the imposition of blanket bans on limited company contracting in response to Off-Payroll resulted in mass contractor walkouts. This move caused heightened skills shortages and project delays, offering an eerie taste of what is to come for the private sector.

In an effort to offload their own costs, some public sector clients have persecuted contractors by deducting their own employer’s National Insurance (NI) liability from the contract fee, and using similar underhanded tactics to reduce the amounts paid out.

Exploiting contractors by compounding tax hikes with unlawful reductions in pay has proven commonplace among public sector clients, most notably within the NHS. Far from being the high earning, tax-savvy individuals that HMRC perceives, many contingent workers who remain in these exploitative arrangements are relatively low paid and have no better alternative options for work.

Legislation puts strain on contractor/agency relationship

Karpman describes the ‘rescuer’ = as someone whose primary interest is ‘an avoidance of their own problems disguised as concern for the victim’s needs’. Though we must not tar all agencies with the same brush, this is certainly an accurate description for the less candid recruiters.

Agencies are the middlemen whose job it is to make sure everyone is happy – yet their priority is the client, who ultimately wants three things when it comes to contingent labour:

  1. Attract quality contractors
  2. Negate tax and employment rights risk
  3. Minimise expenditure.

Within the confines of an engagement compliant with Off-Payroll, a client can’t attract the best contractors without either leaving themselves open to tax risk or incurring greater costs. The majority of contractors won’t blindly accept contracts advertised as ‘inside IR35’ without at least increasing their rate by a proportionate amount.

Unfortunately, the fallout from the public sector changes has shown that many agencies are prepared to help their client achieve all three goals, by hook or by crook. Some lie to contractors about the IR35 status of contracts. Others have been known to advertise contract rates which are then subject to employer’s NI deductions, unbeknown to the contractor at the time of the agreement.

Off-Payroll: how to rescue these relationships

Contrary to the misinformation spread by Government, all contractors want is to be treated fairly. As the party with the least control, yet arguably most to lose, contractors are the victims of both Karpman’s triangle and the Off-Payroll rules. Yet, with many clients and agencies in cahoots, many risk being forced into an unfair situation and subject to excessive tax.

The legislation is riddled with fundamental flaws which threaten a breakdown of the dynamic between client, agency and contractor. If changes aren’t made to ensure that no one party has the upper hand, the issue may never be resolved.

If Off-Payroll is to remain the same, the solution lies with the agencies. Contractors are wise to the perils of Off-Payroll and the tactics being employed by some clients and agencies. The public sector has shown many contractors are willing to leave if they feel they are being taken advantage of.

Transparency and honesty are, therefore, key for agencies to attract talent and maintain a healthy supply chain. The message from agencies should be the same as from contractors: if clients want access to talent, they will either have to accept the accompanying tax risk or extra cost.

Inevitably not everyone will play by the rules. Unscrupulous clients will identify the non-compliant agencies, who, in turn, will likely be dealing with contingent workers at the lower end of the pay scale with next to no bargaining power. Unfortunately, when it comes to Off-Payroll, those who can least afford will be most affected.

Published: 17 January 2019

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