IR35 compliance could become the responsibility of the client, according to one suggestion by HMRC in its IR35 Intermediaries Legislation discussion document. This is not a new idea, indeed, it is where IR35 started back in 1999.
But it could turn out to become the preferred option for contractors. This is because by pushing the responsibility onto the client, HMRC will solve IR35 all in one go. It will be impossible to catch anyone because it will be in everyone’s interest to tell the taxman exactly what it won’t want to hear – that all contractors are outside IR35.
You can imagine the contractor/client conversation: “If you want to hire me as a contractor so that you have the flexibility and access to key skills you need, and we all pay less tax, then you need to: (a) sign ‘this’, (b) do ‘this’ and (c) if an HMRC inspector visits, then say ‘this’.” You can assume ‘this’ in each option ensures that HMRC will find IR35 does not apply.
But why would it be in the interests of clients to determine that their contracting workforce is in reality made up of all disguised employees and therefore subject to IR35? After all, clients don’t pay anything extra if a contractor is caught.
It is because right now, with the acute and worsening skills shortages across all the core contracting disciplines, possibly excluding oil and gas, it is a contractors’ market.
If a client decides to impose a rate cut across the board, the best contractors with the right skills will simply jump ship, leaving the less able behind. This has already happened in London’s financial sector following rate cuts by major banking groups.
The same loss of vital strategic skills will happen if engagers become responsible for enforcing IR35 and decide that by default, to avoid any risk, all contractors are caught by IR35. Clients choosing this approach will rapidly find their best contractors leaving.
There will be a powerful force within client organisations, particularly those in the public sector, to focus on reducing risk and to ‘do the right thing’.
As engagers would become responsible for any unpaid tax and National Insurance Contributions (NICs), then you can imagine the finance director of many issuing an edict saying “no limited company contractors”.
And we know from contractors’ direct experiences of the Off-payroll Rules that many public sector clients adopt a default position that their contractors must operate IR35, because they believe that using a limited company is some kind of tax dodge.
But eventually when projects stall and fail, deadlines are missed and organisational performance suffers, someone will ask why and realise it is because there are no decent contractors around anymore. The contractors all left because procurement/finance/HR decided that they all had to operate IR35.
Assuming it is not too late for the organisation, then hiring managers will start to listen to their contractors, and start doing what they suggest with contracts, working arrangements and in response to HMRC enquiries.
There is plenty of lobbying time for big business to get the suggestion that it should become responsible for IR35 compliance removed, which is what happened in 1999. So, don’t hold your breath that HMRC’s suggestion will make the transition into legislation.
But if it did then it would be a result contractors, as it would be in everyone’s best interests – client and contractor – to tell HMRC exactly what the taxman won’t want to hear, and keep genuine contractors where they should be, outside of IR35.