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Will IR35 reforms kill off limited company contracting?

If you are a contractor using a limited company in the public sector, there is a strong risk that from April 2017 your agency could wrongly force you into using a PAYE umbrella company simply to avoid having to meet their obligations to assess your status.

Experts warn the reforms could mean that public sector agencies will attempt to avoid engaging with limited company contractors solely for their own purposes. Instead, they are expected to seek to force contractors into using umbrella companies to avoid financial risk and the operating costs associated with the proposed real time information (RTI) tax collection process.

Although HMRC has maintained that a private sector roll out of the legislation wouldn't follow its public sector introduction, many experts have suggested otherwise. This is a long term concern for all contractors who could:

  • See their means of engagement significantly restricted
  • Suffer a reduction in their take-home pay

The proposals are still under consultation until 18 August but HMRC is expecting the plans to be announced in the Autumn Statement before going live in April 2017. You still have the opportunity to lobby your MP against these damaging proposals, but you will need to act fast.

How will the IR35 reforms affect agencies?

The proposals include debt transfer provisions imposed on the party responsible for determining the contractor’s IR35 status, which will be the agency in the majority of cases. This means that the agency will be at risk in the instance that they fail to deduct tax where they should do.

In theory this is great for the contractor, as IR35 liability with no longer be with them. However, the danger is that agencies will adopt a risk-averse approach and avoid engaging with contractors using limited companies, instead insisting that contractors use a PAYE umbrella solution.

“This is an entirely unfair proposal,” says Dave Chaplin, CEO of ContractorCalculator. “Agencies are neither qualified nor equipped to make a status decision, and the debt transfer should follow the money and lie with the contractor. If a contractor pays tax as outside IR35 and is subsequently determined to be inside, they are in possession of the tax that should have been deducted.

“HMRC is unfairly using this liability as a tactic to encourage agencies to be risk-averse and avoid engaging with limited company contractors, effectively creating a situation where there will be false employment.”

The IR35 debt transfer rules need limiting to fraud only

Whilst the fear factor might lead some agencies to believe forcing contractors into PAYE based solutions is their only option, director at contractor accountancy firm Intouch Duncan Strike argues much of the blame should be placed on the Government for encouraging such an arrangement:

“Attempts by agencies to avoid responsibilities by forcing workers into unsuitable umbrella arrangements that may deny them allowances on expenses is a distortion in the market and wholly inappropriate.

“Contractors should be prepared to stand firm and push back against agencies taking such steps, otherwise it is the contractor who will be paying the price for the agencies action.

“The Government cannot support a situation where people are detracted from a suitable way of working because the supply chain is unwilling to accept its responsibility. This can only be avoided by limiting the transfer of debt to clear cases of fraud.”

How will the IR35 reforms impact the flexible workforce?

Any change would fly in the face of the relationship between limited company contractor and client, eliminating the benefits for both parties. HMRC’s own recent quantitative research acknowledges numerous reasons why clients engage with contractors, including:

  • Increased flexibility
  • Cost-efficiency
  • Reduced financial risk

In addition to losing these key benefits, forcing contractors into umbrella companies means bringing back into play issues associated with the Agency Workers Regulations (AWR). This involves offering workers numerous rights including annual leave.

The main motivation for clients who hire contractors through their company is to engage on a business-to-business basis, avoiding having to comply with complex and costly employment law.

Not only will the reforms make engaging with contractors a less attractive proposition for clients, but 80% of contractors have already said in a recent ContractorCalculator survey that they would not consider this option and instead seek a different contract.

Public sector costs will inevitably increase

“There are a number of potential further risks to the public sector client,” highlights Strike, who claims clients can also expect to see price hikes as agencies increase their margins to compensate for the cost of their own additional resources.

Strike notes that contractors are also likely to increase their rates, and warns of further danger with a depletion of the public sector talent pool. With contractors heading to the private sector in their droves, fees will inevitably be ramped up further to secure the services of the contractors who remain.

But it’s not only financial damage that clients will suffer. Strike points out that engaging a contractor will entail new reporting and requirements for the client to pass on relevant information, which could serve to further reduce the appeal of engaging a contractor in this way:

“Remember, the client is also expected to provide the agency with sufficient information to make the correct assessment of status. A substantial amount of information is going to be required on a number of different occasions during the period of the contract. So the act of engaging a contractor in itself also becomes more burdensome, causing further distortions in the market.”

How you can fight the IR35 reforms

“Despite all of the evidence to the contrary, the taxman still views incorporation as a solely tax motivated exercise,” says Chaplin. “Its latest attempt to restrict this as a means of engagement goes to show this.”

HMRC has maintained that the proposed reforms are only intended for the public sector, but the widely held belief is that a private sector roll out could swiftly follow. This could massively affect the limited company contracting model, costing contractors thousands of pounds in extra tax and substantially reducing the flexible labour market as a whole.

These proposals are not yet law, but intended to be included in the Autumn Statement. The only hope at this juncture is to lobby your MP and stress the damaging effects this legislation will have on the flexible workforce and UK Plc.

Published: 16 August 2016

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