Dave Chaplin is CEO of IR35 compliance solution IR35 Shield and author of IR35 & Off-Payroll Explained
2020 and 2021 were quite the years for the whole market! The pandemic struck, and, in the aftermath, the contracting sector was left reeling as contractors and hiring firms grappled with the incoming Off-payroll legislation, delayed for a year, then introduced in April 2021. With the first anniversary passing, Dave Chaplin, CEO of compliance firm IR35 Shield reflects on what has happened and what the future might hold for contractors and those firms that hire them.
A delay to the legislation alongside a raging pandemic saw some firms ill-prepared by April 6th 2021. Many had little option but to adopt a knee-jerk response, blanket banning all contractors working through their own limited companies because, for them, it was the least worst option, despite it being an act of self-harm.
Contractors left projects in droves, and firms struggled to hire the talent they needed. More competent and prepared firms who took a more considered approach gained an advantage over those who cowed to the pressure. Today, the blanket banning firms struggle to attract the contractors they need at a price they are prepared to pay.
Market changes
The original plans for Off-payroll were to replace the unworkable Intermediaries Legislation, initially enacted in 2000, which policymakers admitted was largely unenforceable.
Those with tribunal experience know that the three most important words needed to protect clients are evidence, evidence and evidence. The requirement to discharge the burden of proof at a tribunal by shoring up a defence with evidence is essential.
Gathering and collating the necessary evidence is crucial because, not surprisingly, judges are hard to convince without any evidence! Remember, HMRC has the power to form an opinion that tax is owed, leaving the onus on the taxpayer to discharge their burden of proof. And to do that requires compelling corroborated evidence.
The soft landing that wasn’t
The government promised the contracting market a so-called soft landing, which meant very little other than a promise by HMRC not to issue penalties to firms who acted negligently. But, the fear-mongering pop-up IR35 experts have arrived again, trying to leverage the nothingness of this political lip-service by making questionable arguments about reasonable care to try and flog their billable hours.
There are two trigger points for reasonable care. One is in the Off-payroll legislation related to conclusions in Status Determination Statements. The other is the lack of reasonable care or “carelessness” outlined in the Taxes Management Act of 1970. Conflating the two to sell consultancy is dishonest when firms most likely do not have an issue.
Whether someone has been careless or not exercised reasonable care is asking whether someone has been negligent. And to answer that, you need to understand who the person is, what they know, what is in their mind at the time, and whether they did or didn’t perhaps do what they should have known to have done. HMRC’s guidance on penalties for carelessness is a percentage between 0 and 30% on top of the extra tax due. Only if errors have been deliberate and concealed do they hit 100% – which isn’t a reasonable care issue. HMRC has also never won a carelessness argument on an IR35 matter in tax tribunal for the 22 years since the legislation began. The burden of proof is on HMRC, and given the subjective nature of IR35, it isn’t easy to see how they ever will.
If HMRC turns up many years later and asks the right questions to ascertain whether a firm (or person) has been careless or not, guess what you might need to have to show that you haven’t been? Yes, evidence again. And, more importantly, of the right kind.
The topic of reasonable care is not straightforward. Neither is Off-payroll. And neither is understanding the rules of evidence. And this is why expertise by professionals with proven tribunal experience commands a premium.
Tax Offsets
One major flaw in the Off-payroll legislation was revealed by the Government’s National Audit Office (NAO) and confirmed by the Head of HMRC at the Public Accounts Committee on February 21st 2022.
Despite multiple representations being made to HMRC for almost two years, they did not seek to put into law a statutory instrument to cater for tax offsets when unwinding an “outside IR35” position if HMRC successfully overturned the status decision.
We all surprisingly discovered that the client pays the total amount of tax, and the contractor gets a refund for any corporation tax and income tax on dividends they have already paid. These facts have dumbfounded tax experts.
This finding has consequences in the IR35 insurance industry because it means any insurance policy bought by a contractor which purports to protect other parties in the supply chain does not work. They don’t work because there is no “insurable interest.”
According to the Association of British Insurers, insurance law means “you can only buy insurance for something or someone in which you have an insurable interest.”
Are umbrellas working?
With an increasing number of contractors pushed into working through umbrella firms, the spotlight has shone on them to reveal that some have been duping contractors out of their entitlements – rackets on withholding holiday pay and other skimming scams have come to the fore. These scams must stop, and an umbrella that operates a business model around retaining any monies other than the margin they charge may need to recalibrate.
HMRC has called for evidence on the umbrella sector, and regulation will come.
The shape of the IR35 market to come
So, what does the future hold for IR35? Many firms are, at last, engaging with the new legislation. They must, if they want to gain access to the talent they need.
Whilst many freelancers have left contracting, for those resilient enough who have stuck with it, opportunities are opening up where the new legislation doesn’t apply, such as working with small consultancies or working remotely for overseas clients.
Small niche consultancies are likely to grow and steal market share from recruiters. Some recruiters are trying to set up consultancy arms, but HMRC is alive to this, and their compliance checks ask questions about ‘fully contracted-out service providers.
The dust is settling. HMRC will get what they wanted (i.e. more money), and contractors will ultimately survive, so firms can look forward to hiring with confidence again.
