New IR35 status tests are badly needed to provide certainty to contractors and all others in the contracting supply chain, as well as to everyone else involved, including HMRC. But any new IR35 status checks would have to be very carefully designed, because if they exclude genuine contractors, they could do even more harm than the present unruly, untidy and unfair ‘system’.
Genuine contracting businesses typically provide specialist skills or additional capacity to clients that do not want the expense or risk of hiring a permanent worker. Contractors tend to work for a single client on a specific project that requires a high degree of skill and often experience; in fact, on many contracts the contractor is often the only person who knows exactly how the project should be performed.
On occasion a client may simply require an additional pair of hands to complete tasks that the client directs, and such work may require no specialist skills or experience. This is not how contractors work, and is akin to the way an agency worker, temporary or employee works.
Genuine contractors choose the freelance lifestyle over permanent employment because they can decide where to work and which projects they prefer to work on. In exchange for taking the risk of self-employment, without the comfort blanket of employment rights and benefits, contractors benefit from paying lower rates of tax and often higher rates of pay.
It is vital for the continued recovery of UK PLC that client organisations have access to a pool of highly skilled, experienced and flexible workers that are available when needed. So new IR35 status tests that catch genuine contractors in the IR35 web would directly damage UK PLC.
IR35 in its current form is deeply flawed for many reasons; for most contractors and their advisers its deepest flaw is probably the uncertainty it creates. In between the black and white of permanent employees and entrepreneurs are the endless shades of grey inhabited by contractors, made worse by using inappropriate tests of employment status based on employment law and case law. It was when we created the ContractorCalculator online IR35 test that is became apparent just how many shades of grey there are.
The time is right for new IR35 status tests to be created that provide the certainty contractors require. The tests must be easy to administer, unambiguous and correctly classify genuine contractors as just that – independent small businesses providing a service to clients, and benefitting from their risk taking through lower taxes and potentially higher incomes.
But if new IR35 status tests are poorly thought through and start catching genuine contractors in the net, classifying them as employed and insisting they are taxed as employees, then a major element of the incentive to choose contracting disappears.
That would result in many contractors choosing to become permanent employees – after all, if they’re paying tax like an employee, they may as well also have all the benefits and rights that come with employee status.
The end result would be the shrinking of the pool of available talent. The flexible workforce would be badly affected and client organisations wouldn’t have access to a flexible, highly specialised resource right at the time when it’s most needed as the UK recovers from recession.
Those contractors remaining will be in scarce supply, resulting in increased demand and rate increases, prompting some clients to offshore operations they previous relied on UK contractors to perform.
New IR35 status tests could be of huge benefit to contractors, but could equally become a double-edged sword. It is essential that they be designed to exclude genuine contracting businesses.