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Rife Off-Payroll non-compliance killing flexible workforce, our survey reveals

The UK’s flexible workforce is being decimated by rife non-compliance with the Off-Payroll legislation by clients and agencies, themselves hampered by burdensome compliance requirements and poor preparation by HMRC. The resulting turmoil is set to impact firms heavily, significantly diminishing access to contingent labour, while driving up costs and inciting litigation from contractors who remain.

This is according to a survey of more than 12,000 contractors by ContractorCalculator (click here to read full report), the largest survey to date of the flexible workforce concerning IR35, which found that:

  • 62% of contractors say clients haven’t provided a Status Determination Statement
  • 54% report to have had employer’s NICs unlawfully deducted from their rate
  • 52% of firms are losing at least half of their contractors due to IR35
  • 58% willing to take client to Employment Tribunal over ‘inside IR35’ classification
  • 23% plan to quit contracting due to IR35, and 21% intend to change career

“With this draconian legislation Government has stripped the contingent workforce of its flexibility and mobility, so much so that more than half of contractors no longer see it as a viable working model,” says ContractorCalculator CEO Dave Chaplin. “Much like the public sector rollout, hirers and agencies are months away from implementation with no final legislation published and a feeble amount of HMRC guidance from which to inform decisions.

“We are already witnessing the breakdown of engagements as a result of widespread non-compliance that Government has shown no interest in rectifying. This flies in the face of HMRC’s rhetoric about ‘fairness in the tax system’. It’s also ironic, given the fallout will significantly impede HMRC’s tax yield.”

Off-Payroll non-compliance crisis with blanket rules widespread

A key criticism of the Off-Payroll legislation has been the burdensome compliance requirements, uncertainty and subsequent tax risk imposed upon clients and agencies. Multiple Off-Payroll consultation responses warned HMRC that its demands would result in widespread non-compliance, and the survey findings show this to be the case in the majority of engagements.

HMRC continues to downplay the issue of blanket assessments, but the survey findings support the many similar reports of non-compliance that the taxman has previously referred to as ‘anecdotal’.

  • 26% of clients have imposed a blanket ban on limited company contractors
  • 16% have conducted blanket role-based assessments
  • 10% of clients have made blanket determinations without conducting assessments
  • 68% of contractors weren’t even involved in the status assessment process

“Whether HMRC considers feedback from over 12,000 members of the flexible workforce ‘anecdotal’ remains to be seen,” comments Chaplin. “What we know for certain is that the figures gathered point to non-compliance and confusion on a grand scale. As a direct consequence of HMRC failing to prepare and educate the market, UK Plc is going to suffer considerably.”

Despite the Off-Payroll legislation making it a legal requirement for clients to provide contractors with a Status Determination Statement (SDS), only 38% of contractors claim to be in receipt of one. Meanwhile, 62% have not been provided with reasons for their status outcome, despite being a requisite of an SDS. As a by-product of this:

  • 69% of contractors claim their client’s status assessment process was unfair
  • 58% of clients are accused of not adhering to ‘reasonable care’

Questions have been raised as to whether use of HMRC’s Check Employment Status for Tax (CEST) tool constitutes reasonable care. Regardless, it is being used by 53% of clients to conduct assessments, despite its known flaws, and the fact that only 3% of contractors trust its accuracy.

Mistrust of HMRC is also a concerning issue. 79% of contractors do not trust the taxman to stand by the results issued by CEST. Of course, the fallout from a challenge to CEST would be felt by the client, as NHS Digital recently found out when subject to a £4.3m tax bill.

Contractors forced into false-employment and double taxation

A combination of blanket assessments and use of CEST have meant only 27% of respondents have secured an ‘outside IR35’ decision. This is far fewer than forecasted by HMRC, which has previously stated that roughly two-thirds of workers should be outside the scope of the rules.

And while indications are that a large portion of contractors have been forced into false-employment, a measly 1% of contractors have successfully managed to overturn their status determination. This is a predictable result of HMRC’s ‘client-led status disagreement process’, which experts have warned effectively renders clients judge, jury and executioner. Meanwhile:

  • 13% disputed their status but determination remained the same
  • 22% are still awaiting an answer
  • 27% have been told they are not allowed to dispute their status

In addition to forcing contractors into false-employment, the majority of clients and agencies appear to be subjecting contingent workers to effective double taxation by unlawfully deducting employer’s National Insurance Contributions (NICs) from the contract rate.

Of contractors deemed ‘inside IR35’, 79% say employment taxes are being deducted from their rate. This is contrary to the Off-Payroll legislation, which requires that the ‘fee-payer’ pay this sum on top of the rate. It is also in breach of the Social Security Contributions and Benefits Act 1992. Meanwhile, just 21% of clients and agencies are abiding by the law in paying their new tax liabilities in addition to the contractor.

Worryingly, 45% of contractors have been told by clients or agencies that being ‘inside IR35’ means employer’s NICs are to be paid out of the contract rate, raising further questions over HMRC’s efforts at educating the private sector. Such unlawful deductions will inevitably lead to litigation from contractors to recover monies owed, with non-compliant parties having few arguments to fall back on.

Further efforts by clients to mitigate their own tax burden have yielded mixed results. When asked whether firms had attempted to renegotiate their contract rate, 78% of contractors said no, while 5% said renegotiations had resulted in a rate increase, compared to 11% who noted their rate had been reduced.

Non-compliant firms suffer contractor exodus

One inevitable outcome is abandonment of projects and diminished access to crucial contracting talent. When asked about contractor retention at their current or most recent client in response to the Off-Payroll legislation, contractor feedback was damning:

  • 27% estimated roughly 50% of contractors had left
  • 18% believe roughly 75% of contractors had left
  • 7% claimed clients had lost effectively their entire contingent workforce

Meanwhile, 48% of contractors predict clients will suffer short-term damage due to Off-Payroll, while 41% foresee long-term damage. Ironically for HMRC, efforts by clients to mitigate the impact will hamper the public purse. 41% of respondents claimed that their clients had moved at least some work offshore as a result.

A significant number of contractors are also considering working overseas, with 39% acknowledging it is at least ‘somewhat likely’ that they will do so. In addition to this:

  • 23% plan to quit contracting as a result of the Off-Payroll legislation
  • 21% of contractors intend to change career
  • 13% plan to retire due to the Off-Payroll legislation

Reduced talent pool poses new problems for hirers

While a chunk of the flexible workforce is set to be lost to the Off-Payroll legislation, it will also be far from plain sailing for clients engaging those who remain, especially those in rural areas.

In addition to the tax hit, an ‘inside IR35’ assessment under the Off-Payroll legislation prevents contractors from claiming the travel expenses necessary to make working long-distance contracts a viable option. This threatens to severely restrict the flexible workforce’s mobility, with 45% of contractors stating they will no longer travel for an ‘inside IR35’ contract, and 50% claiming they would only do so if the rate were increased accordingly.

There’s also the danger of considerably costly employment rights claims. 93% of respondents believe contractors should receive some degree of employment rights should they be deemed ‘employed for tax purposes’. 58% indicated that they would be willing to pursue a claim via the Employment Tribunal (ET) in order to secure these rights.

Is there a simple solution?

It’s clear from the feedback provided that the Off-Payroll legislation is unsuitable for contractors, business and HMRC, with burdensome compliance requirements and poor preparation from the taxman inciting non-compliance from firms and agencies.

A recent suggestion to help HMRC secure its projected tax yield without imposing an excessive compliance burden on industry or subjecting contractors to non-compliance is to introduce an effective ‘contractor levy’. This tax would be paid by clients on top of the rates paid to contractors, regardless of IR35 status. 79% of contractors were in favour of this solution, with 31% believing a reasonable rate to set the levy to would be 5%.

Published: 05 March 2020

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