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Public sector contractors need to renegotiate contracts now to avoid IR35 risk

If you’re contracting in the public sector you need to act fast to renegotiate contracts with agencies and end clients, or risk excessive taxation as a result of the IR35 reform.

With the public sector changes only two months away, chief executive of the Association of Independent Professionals and the Self Employed (IPSE) Chris Bryce warns that many contractors have little time to ensure they remain engaged on a business-to-business basis:

“Contractors need to speak to their agencies and end clients immediately. They can’t afford to wait on a four week notice period or until 6 April itself. If the client is insisting that the contractor is inside IR35 having followed HMRC’s instructions, the contractor needs to begin negotiations over a new contract.”

Does IR35 reform warrant contract renegotiations?

Public sector contractors face a predicament. There is the very real possibility that an engagement that a contractor has previously assessed as being outside IR35 will be deemed inside by a cautious client when the compliance burden shifts on 6 April.

The risk is that even if you were engaged outside IR35 you will be placed on the payroll once the reform is implemented, calling your prior engagement into question in the process.

However, as Bryce points out, the change in circumstance warrants further consideration from all parties involved: “It’s IPSE’s view that, if the contract is fundamentally changed at the will of the end client, it follows that the agency should issue a new contract which reflects the new arrangement.”

Contractors need to approach agencies now

“It places the contractor in a very difficult situation,” Bryce continues. “But a change in IR35 status is a fundamental change to the contract which isn’t usually covered by contract terms, so a new contract is required from the agency’s perspective as well as the contractors.”

Despite this, Bryce emphasises that contractors need to raise the issue themselves as a new contract may not be issued automatically:

“Good quality recruiters will want to ensure the contract reflects the working arrangements, and they will want to work with contractors to ensure this happens. Contractors should therefore approach their agencies to have their contracts renegotiated.

“IPSE will work with the Recruitment and Employment Confederation (REC) and the Association of Professional Staffing Companies (APSCo) over the next couple of weeks to issue advice to all parties. This advice could be forwarded onto individual agencies as required.”

Contractors urged to get invoices in early

This comes a week after IPSE issued a warning to public sector contractors to get their invoices in early to ensure their payments aren’t subject to Pay As You Earn (PAYE) income tax.

Contractors who invoice one month in arrears will need to get their invoices issued on or before 6 March in order to receive payment prior to the 6 April implementation date and avoid potentially excessive taxation. But Bryce says you may want to go to greater lengths to protect your pay prior to the deadline:

“Any work completed during March but paid for after 6 April will be subject to the new rules. I’d recommend that contractors insist on weekly or even daily payments if they can in order to minimise the losses suffered as a result of this ill thought out legislation.”

‘A morass of complexity and greyness’

The threat that contractors will be bundled onto a payroll once the new rules come into play is only intensified by the ongoing questions surrounding HMRC’s ESS tool. Just two months until the reform and the taxman is yet to convince stakeholders that it will work.

“We’ve seen an early prototype,” comments Bryce, who notes that IPSE will be seeing a more recent version over the coming days. “We’re struggling to make sense of it and so are public sector bodies. “As it stands the tool clearly isn’t ready.”

Bryce acknowledges that the overall structure of the tool has been set and that the questions generally relate to case law, but adds that it is yet to be seen how the questions will be weighted.

“IR35 is a morass of complexity and greyness. For that reason we believe that HMRC will struggle to get a tool that can accurately reflect the nature of any engagement.”

HMRC refuses to rule out retrospective action

The risk of retrospective HMRC action is also very real. Experts have warned that a public sector contractor being found inside IR35 under the new regime would be an open invitation for an HMRC investigation into their affairs prior to 6 April.

IPSE asked the taxman to declare an amnesty on contracts which overlap into the new tax arrangements to offer some assurance to contractors. However, Bryce notes that HMRC refused to provide this assurance, and concedes that it is likely that some contractors will be subject to retrospective investigation.

“If contractors want to continue with a public sector client, they should arrange for a completely new, properly worded contract to be in force from 6 April 2017,” Bryce concludes. “This should not be an extension of a current contract. Failing that, the contractor should consider negotiating a rate increase to account for loss or earnings.”

Published: 07 February 2017

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