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HSBC will cease engaging limited company contractors from this September, saving itself the job of having to assess them under a new IR35 from April 2020, ContractorUK has learnt.

The bank has told all PSC contractors at key units like HSBC Digital that after one further contract extension, they must choose between being terminated or becoming employees

But HSBC has sweetened its ultimatum for some contractors on a so-called ‘keep’ list it has drawn up, by saying they can stay on as long as they work via a third-party from September.

The thinking at HSBC is that it will remove itself from April 2020’s obligation to decide contractors’ IR35 status, by making them staff or a third-party’s PSC. Or just by axing them.

'A sledgehammer to crack a nut'

“Culling a flexible workforce and replacing them with employees will remove any IR35 concerns for HSBC,” status advisory Qdos Contractor confirmed last night.

“But it’s a worryingly short-sighted approach to dealing with IR35 reform [akin to] using a sledgehammer to crack a nut.

The advisory’s Seb Maley then cautioned HSBC -- voted ‘best client’ by ContractorUK readers in 2017: “Moving contractors to a third-party supplier is also a risky move.

“We recently reviewed dozens of such arrangements for a large public body and a significant proportion of them were ostensibly providing labour – in the same way an agency would – but dressed up as a managed or outsourced service. This provides a false sense of security as, legally, the original client – HSBC if this goes ahead -- must still make the determinations.”

Whether the bank goes ahead with its September ultimatum is indeed still a question, according to another expert on IR35, Bauer & Cottrell. Its co-founder Kate Cottrell said:

“[HSBC] could see all their talent disappear and just like what happened in the public sector [before IR35 reform was introduced there], the bank may then have to change its approach.”

'Projects at risk'

Yesterday, a source inside HSBC suggested a contractor exodus is already looming, implying that experienced contractors will not want to go permanent or be engaged by a third-party .

“Come September”, he said, “a load of key people with excellent knowledge of how to get technical stuff done at HSBC will go, putting the bank’s programmes and projects at risk.

“Then, if another bank applies the IR35 reforms correctly-- rather than HSBC’s throw-out-the-baby-with-the-bathwater approach, they will be able to hire the cream of available talent.”

'Premature'

Bowers Partnership, a recruiter of niche financial contractors confirmed: “As we’re still several months away from the draft legislation…for HSBC to make such a bold move – assuming it transpires, seems somewhat premature.

“Even if it doesn’t, surely most of the contractor workforce at HSBC will be now limbering up for a serious summer of job-hunting? There are four productive months between now and September, and the good contractors should be able to bag a new role elsewhere”.

Yet a senior IT recruiter, Les Berridge, wonders what may happen to the industry in those four months, especially if HSBC’s ‘cease and desist’ PSC model due to IR35 reform is copied.

'Ripple-effect'

“Major financial institutions set the trends for all contract work in the UK,” began Berridge, the REC’s IT sector executive-committee vice-chair, who was speaking yesterday in a personal capacity.

“If they [all] ceased to hire contractors, it would create a ripple effect across the whole contracting community, in every sector, which would be bad for contractors, bad for the £35 billion recruitment industry but most of all, bad for British businesses.”

In an appeal to end-users tempted by HSBC’s plan to stop using PSCs by saying – ‘go permanent, go third-party or leave,’ the Networkers recruiter urged -- “hold your nerve.”

Berridge also advised: “If a role is on a project basis, using a properly insured PSC, working independently, it is most likely to be outside IR35.”

'Drastically conservative'

Yet it is the advice which HSBC presumably received that led to it drawing up the September ultimatum which interests Colin Morley, director of recruitment solutions at Harvey Nash.

“I’d be interested to know who advised HSBC to take such an approach. Are they being drastically conservative or is there a bigger play whereby they’re getting a lot of contractors to leave in September, before reengaging with them after April 2020?” he asked.

Either way, Morley is “surprised” at HSBC’s stance, partly as the amount of planning required -- given HSBC is a massive user of contractors -- will be “eye-watering.”

“With projects and programmes in flight already, will they have enough time to swap the resources out and still ensure a smooth knowledge transfer?” he asked. “It is a brave call, particularly in FS, to be the first to do this. Sometimes though, history favours the brave.”

'Deemed employment risks'

IT staffing firm First Point Group sounds less curious. It says engagers are already turning their backs on directly engaging PSCs, and not just since IR35 reform came on the radar.

“If HSBC are indeed moving away from directly engaging with limited company contractors, then that is pretty standard in many major companies’ contingent workforce practices.

“Many only engage contractors via a third party — a recruiter, a payroll firm, or a strategic partner”, the firm said, “[as] this may mitigate their deemed employment risks [under the Agencies Workers Regulations].”

However such inserting of a third party “will not alone circumvent the IR35 changes next April,” cautions the firm's London office managing director David Taylor.

“Agency contingent workforces will also need to amend engagement types with their PSC contractors for all parties to comply,” he said last night. “More guidance on the final implementation of the IR35 changes from HMRC is due in the coming weeks.”

'Properly understand risk'

But by that stage, one HSBC contractor yesterday hinted he’ll already be actively searching for a new contract, even though, by comparison to some of his co-workers, he’s a newcomer.

At the other end of the experience scale is a veteran IT contractor whose former colleagues are at HSBC and affected by the bank’s September ultimatum.

“Good to know -- isn’t, that our big financial companies property understand risk,” the contractor scoffed.

“Basically, [with its ultimatum] HSBC are [in effect saying they are] happy to pay extra for permanent staff -- given the overheads they incur…-- or pay extra to third parties, rather than incur no additional costs at all and use contractors properly, outside IR35 parameters.”

'Not holding my breath'

Meanwhile, quite apart from what it says about the bank, the insider at HSBC fears that the implications for what the ultimatum says about the future of contracting -- as a whole, could be stark.

“How companies decide to approach this [off-payroll working rules from April 2020] in the long term will decide if limited company freelancing remains a viable option”, he warned.

“If some smart companies do their due diligence and get contracts and working conditions IR35-compliant, then freelance contracting may survive. But I’m not holding my breath.”

An HSBC spokesman said: “Most major UK firms are looking at their post IR35 management of contingent workers and like many companies we have not made any decisions on our future policy towards this important sector of the workforce. We are unlikely to form a firm view until the summer when the final guidance is set to be published by HMRC.”

The taxman must go back to the drawing board with his ‘small’ engager exemption - the key question he fails to ask in his consultation on the corresponding off-payroll rules, experts say.

He should also look at developing an online tool - to be used alongside CEST -- to help affected parties determine if the engager is ‘small,’ says one of those advisers, JSA Group.

But ‘affected parties’ is another of the now-closed consultation’s unanswered questions, in terms of who decides if the engager is ‘small’ and who passes the decision down the supply chain, the group said.

And exactly when the passers-down of the decision must act is another question that needs an answer, according to the Institute of Chartered Accountants in England & Wales.

'Too complicated'

Of the consultation respondents to criticise the carve-out for ‘small’ engagers (defined as fewer than 50 staff or under £10.2m in annual turnover), the institute is among the more positive.

It “welcomes” the exemption which in effect means companies within it need not apply the IR35 rules from April 2020 but, even so, says the definition used for ‘small’ is “too complicated.”

“There are a number of practical considerations that require further consideration for the exemption to be workable,” the ICAEW warns.

“[Such as] at which point in time the test should be performed together with when the new rules should be operated - for example at the start of the following tax year.”

'Appropriateness'

Another tax body the ATT isn’t overly impressed with the exemption either. “We question the appropriateness of the proposed definition of ‘small.’

“[We] suggest an alternative test based on the extent of an entity’s engagement of off-payroll workers. We think that further consideration is required to the date from which an entity is required to apply the proposed provisions once it has ceased to be ‘small;' however defined.”

The definition, as currently proposed by HMRC, is found under the Small Companies Act, but the act’s rules are “regularly misapplied by accounting professionals,” says JSA chair Chris James.

'Increased confusion'

“In addition, size criteria are determined retrospectively in the normal course of business. Here, the reform is intending to exclude small business from the reform, which has merit.

“However the process of deciding who is small and who is not is not defined,” Mr James says in JSA’s consultation reply. “This will lead to increased confusion, and the rules being misapplied.”

Other ‘misapplication’ may be intentional. “It will be necessary to consider anti-avoidance rules to prevent the fragmentation of a large client into many small entities who could then engage all the contractors and supply them to the fragmented client,” says the ICAEW.

'Standard HMRC form'

So the prospect of HMRC certifying engagers as ‘small’ and therefore exempt from the 2020 framework has been raised to the department, alongside ‘self-certification’ if end-users themselves will decide their applicability to the rules.

“Where the client qualifies as ‘small,’” says the ATT, “we think that there should be a requirement for the client to communicate that fact to the fee-payer and/or worker.

“We suggest the provision by HMRC of an appropriate standard form or wording.”

'Arbitrary and unfair'

Currently, the indication from the Revenue is that engagers would gauge whether they are ‘small’ - and therefore exempt - by applying the Companies Act criteria on an accounting period by accounting period basis.

Then, and assuming the engager qualifies as ‘small,’ the off-payroll working rules would apply from the start of the next tax year, following the end of that accounting period.

The Association of Taxation Technicians (ATT) reflected: “The amount of time that affected organisations will have to prepare for the application of the off-payroll working rules will depend upon their accounting period end, which appears to be rather arbitrary and potentially unfair.

“By way of example, an organisation with a March year end will only have five days from the end of their accounting period before the rules apply, whereas a business with an April year end will have over 11 months.”

'Question the logic'

The association says the answer is for HMRC to grant a period of at least one year from the end of the accounting period in which an engager ceases to be ‘small’ before the rules must be applied.

A recruitment drive or the securing of a large contract are among the developments that could cause engagers to lose ‘small’ status. But strangely perhaps, such factors won’t apply in the public sector.

“We question the logic of confining the application of the small test to the private sector and recommend consideration of its application to public sector organisations which meet the same criteria,” the ATT said.

The ICAEW agrees, saying :”We strongly believe that having different tax rules for some engagers in the private sector is unsustainable in the longer term, leading to greater complexity, unfairness, a greater administrative burden and the likelihood of more mistakes and ultimately non-compliance.”

'Far more onerous'

Greater administrative burdens - like the small company carve-out – are another area that the consultation fails to give enough consideration to, according to IR35 firm Bauer & Cottrell.

“Saying the ‘smallest organisations will not have to determine the employment status of the off-payroll workers they engage’ sounds good, but has anyone considered the fact that tens of thousands of small organisations will become ‘fee-payers’ under the new rules?,” asks the firm’s Kate Cottrell.

“The government claims to be fully behind these small businesses and everyone is encouraged to give contracts to them, but the mechanisms needed to deal with these rules, as a fee-payer, are far more onerous than deciding the status. And what of the costs - Employer NIC, new software and reporting requirements to name just a few?”

'Same principle'

The Association of Independent Professionals and the Self-Employed (IPSE) recommended: “Clients that meet the small company exemption requirements must be obliged to declare their status to the PSCs they engage. PSCs should not be expected to apply tax rules based on the silence of the end user client.”

In its submission to HMRC, the association added that the "same principle" should apply throughout the supply chain.

“Small companies should be required to inform the supply chain they are ‘small’, according to the Companies House definition, and that the IR35 liability therefore rests with the worker’s PSC,” IPSE said.

'Critical'

Meanwhile, Mr James of JSA suggested HMRC was wrong not to ask more broadly about the small company exemption.

“The consultation proposes the use of Companies Act size limits to classify end-users as small or otherwise. It does not ask an explicit question about this approach other than a very narrow question about applying parts of this test to unincorporated entities,” he said.

“It is not clear why this is, as the assessment of company size is critical to the law – if you are small, the rules don’t apply.”

Two more financial firms have foisted a finite number of renewals on hundreds of limited company contractors, as part of their bid to “sidestep” IR35 reform, ContractorUK can reveal.

Mirroring HSBC’s policy last month, M&G Investments and Morgan Stanley have each internally said that their operations will no longer engage PSC contractors after certain dates this year.

The furthest away of those differing dates is December 2019 – in place at M&G Investments, but the uncertainty for PSCs at the company seems greater than for those at HSBC or Morgan Stanley.

'Sit tight'

In fact, HSBC and Morgan Stanley contractors have been given ‘options,’ such as working inside IR35, but M&G’s have only been told “something will be in place” post-December.

The absence of a solution, mooted to be incoming between M&G and Resource Solutions (RS) – which also supplies contractors to HSBC, is making most contractors “sit tight,” a source also said.

A request for Resource Solutions to comment on how it is helping clients with IR35 reform was not responded to. But a spokesman for Prudential, parent of M&G Investments, said:

“We are still finalising our approach to IR35, and [a] communication will follow to all of our impacted contractors once we have done this.”

The M&G spokesman also told ContractorUK: “In line with the rest of the financial services market, it is imperative we operate a fully-compliant, revised engagement model.”

'Unable to wait'

The latter seems to be code for HMRC requiring large firms to have a Senior Accounting Officer in place, to take responsibility for their operation’s tax and accounting arrangements.

And SAOs at ‘qualifying companies’ can be fined personally, as can their companies, if they cannot show HMRC Customer Compliance Managers that robust risk processes are in place.

“SAOs are unable to wait to see the results of consultations, potential ‘solutions’ or to see what the draft legislation looks like,” says ex-tax official Kate Cottrell, an IR35 specialist.

“The fact that there are different dates [that PSC contractors will stop being engaged after]…suggests that these proposed actions are somehow linked to the SAO rules, as the dates for declarations [to HMRC] are tied to the accounting year of the particular company.”

'Not sure of the ins and outs'

Six months before IR35 reform is due to bite, October 2019, is the deadline which Morgan Stanley (MS) contractors are under, as the bank will cease and desist PSC hiring after then.

“But I’ve got to give an indication of which one [of the following options I want to go for] by tomorrow end of play,” says an MS contractor, clearly feeling pressured to make a decision.

“[The options are] leave MS; go full-time or go PAYE. [But] I’m not sure of the ins and outs of going PAYE…I’m also not sure about if I want to tie-up [my] company and go full-time.”

Advising on those financial impacts, including ‘go PAYE’ seeming to indicate an ‘inside IR35’ contract, is Broome Affinity, which the PSC shared his ultimatum from Morgan Stanley with.

'Uncertainty fuelling the flight'

The accountancy firms’ co-founder Alan Broome said: “This [communication from the bank] feels like the thin edge of a rather large wedge.

“Other banks are rolling out similar approaches…[though] ideally everyone in the hiring chain should be sitting down and hammering out new engagement terms.

“Unfortunately, there’s little evidence of this. What I do see is a lot of contractors winding up their companies… [as] many are retiring or taking staff positions. It's the uncertainty that's fuelling this flight”.

Asked about its IR35 reform policy, Morgan Stanley said it would not comment.

Online however, a staffing agent (unconnected to Morgan Stanley) hinted that the bank’s reaction to the 2020 reforms was favourable.

'Sitting on the fence'

“At least they [Morgan Stanley] are not sitting on the fence and are communicating clearly their corporate plan. It leaves PSCs in no doubt”, said the agent, Louise Wood.

The contrast is M&G Investment’s reaction. “There is no clue in the communications contractors have so far received as to what happens after their final extension in December.”

A recruiter who once placed contactors at M&G also said: “The suggestion is that RS are working with M&G on some kind of workaround -- but when or what is unknown.”

Seb Maley, chief executive of Qdos Contractor, sounded unimpressed with all the firms – HSBC, M&G Investments and Morgan Stanley, implying none of their policies should be encouraged.

'Sidestep IR35 reform'

“By the sounds of it, these companies will stop engaging contractors in due course, which is short-sighted and unnecessary…as they seemingly attempt to sidestep IR35 reform,” he said.

“Offering contractors such ultimatums will simply deter these workers, who would much prefer to work with clients that are able to set their tax status fairly, allowing them to continue providing a contract for services, outside IR35.”

But not all such workers -- at least not so far. “Two contractors I know [at M&G] are going to accept the final extension [until December],” says the ex-M&G agent, “so it’s ‘wait and see’.

“For now, they like it there. They like the work; the conditions and the work-life balance. There’s also great technology, so they plan to sit tight and wait until the contract is up.”

'Blanket decisions'

However, Broome Affinity believes that there are other reasons why contractors will toe the line.

“There does seem to a tacit acceptance, certainly from bums-on-seats contractors, that this [taxing reform to how off-payroll workers operate] has been coming,” Mr Broome said.

“The obvious, and very real, potential outcome of this is that the genuine contractors are hoovered up in ‘blanket’ decisions along with the rest.”

A critic of such across-the-board IR35 status decisions, Qdos Contractor offered some guidance for contractors’ clients yet to fully formulate their 2020 strategy:

“In theory, a consultancy providing – and managing -- a project on behalf of an end-client will take on the responsibility for determining the status of any contractors it engages.

“This is because the services are, as HMRC describes, ‘fully contracted out’ and therefore the engager for the purposes of IR35 is the consultancy rather than the ultimate client.”

'Bit of a get-out'

The advisory’s Mr Maley says he thinks many end-users regard the ‘fully contracted out’ model as a "bit of a get-out," and so are pushing consultancy models onto agencies to absolve themselves of responsibility and risk from next April.

“But it’s a dangerous game to play,” he cautioned, referring to both consultancies and Statements of Works. “If it isn’t genuine in nature, HMRC will very quickly see through any contractual agreements.

“This applies particularly where there are already incumbent workers and an organisation is looking to change the nature of the arrangement ahead of April 2020. It will be very difficult to truly alter the nature of an existing project or relationship to be one that is genuinely contracted out.”

'Gift from God'

Nevertheless, for some commercial parties, including consultancies but potentially agencies too, the off-payroll working proposals for the private sector represent “a gift from God.”

The former M&G agent also said in statement: “The big Recruitment Process Outsourcers are all pitching for the same thing.

“A magic wand in the form of a managed service. My fear is that they don’t really care about what’s best for the client i.e. keeping their existing highly-skilled and experienced contractors – it’s all about a massive sales opportunity for the RPOs.”

'The Contractor Departure Lounge'

A contractor ‘on the ground’ at M&G said: “There are probably less than 100 contractors on site at the moment, and the work is being gradually shifted towards permies, while the contractors left are rolling off naturally, in line with project end-dates.

“And those of us who are left are referring to it here as ‘The Departure Lounge.’ Yet most of us are old hands and are all pretty realistic. There is no point making plans for ‘What Ifs.’”

Online yesterday, debate centred on the size of wage cuts that engagers may make to stop PSC-turned-permies dragging their profitability. But the dent for some PSCs could be much greater.

'Too good, for too long'

“One client of mine, when we discussed the potential drop of about 40% in his ‘take-home,’ said something along the lines of, ‘We've had it too good for too long,’” Mr Broome recalled.

“Then he said, ‘It's not like I'll be getting 40% too little, but rather I've been getting 40% too much.’ Personally, I don't think such pragmatism is common, or even necessarily correct.”

But end-users’ IR35 reform ultimatums to contractors, which stem from the ‘cease and desist’ PSC model and start with capped renewals, are common. They may even become ubiquitous.

“The rules for SAOs are, in my view, why these financial companies are making their [IR35 reform] announcements now,” says Ms Cottrell, co-founder of Bauer & Cottrell. “ No doubt we will be seeing many more fairly soon.”

Draft IR35 legislation for off-payroll working in the private sector has today been published in Finance Bill 2019/20, containing a vow to forge ahead with the reforms from next April.

The promise will disappoint 10 contractor organisations who, on behalf of limited company contractors, called for the reforms to be delayed by 12 months due to their sheer scale.

But Jesse Norman MP says the rules to “ensure two people working side by side in a similar role for the same employer pay the same employment taxes,” will hit from April 2020.

'Necessary employment taxes'

Unveiling the bill this afternoon, the Treasury minister also said: “The government has previously announced that it will improve compliance with the off-payroll working rules in all sectors by bringing them into line with the public sector from April 2020.

“The reform will make organisations responsible for determining whether the existing rules apply to the contractors they hire and ensuring the necessary employment taxes are paid.”

But the draft makes clear that it not just engagers who stand to be affected by the framework, which affected parties, including recruitment agencies, have until September 5 to respond to.

'Challenge the determinations'

“The draft legislation also includes provisions to ensure that all parties in the labour supply chain are aware of the organisation’s decision and the reasons for that decision,” Mr Norman said.

“And [the government] will introduce a statutory, client-led status disagreement process to allow individuals and fee-payers to challenge the organisation’s determinations.”

In this sense, the draft includes no “curveballs” – a term Qdos used last night to describe unexpected clauses, because the client-led dispute process was proposed back in May.

'45 days'

The decision-making awareness proposal is also not ‘new’ but to strengthen it, clients will be required to pass their reasoning on IR35 “to both the party it contracts with and the worker ” – within 45 days.

But less positively for PSCs, the official 20-page response to the off-payroll consultation says industry is wrong to imply clients have incentives to be risk-adverse in their decision-making.

“The government does not agree that there are significant incentives for deeming individuals to be employees,” it claims, despite acknowledging clients can be liable if they incorrectly deem ‘outside’ (but not ‘inside’).

'Transfer of liability'

The response adds: “[The government further] considers the client to be best able to understand the contractual terms and working practices of those it engages.

“Clients are also best placed to provide responses in real time. A HMRC-led status disagreement process would not be able to provide decisions in real time, with a consequential impact on the flexibility of the work force.”

Seeming to heap further pain on engagers, new HMRC guidance on the proposed off-payroll rules states: “Provisions to allow for the transfer of liability and the transfer of information through labour supply chains will also be included.”

'170,000; 230,000 and 60,000 = no impact'

At the end of the Revenue guidance, the government adds that the 2020 framework is “not expected to have any significant macro-economic impacts.”

However, the guidance then says taxpayers will ‘shift their structure to mitigate the tax changes,’ which overall will impact some 170,000 individuals who work via their own PSC.

A further 230,000 PSCs will apparently achieve savings (‘by no longer having the requirement for determining status or associated accounting burdens’), and some 60,000 engager organisations will be impacted by having to decide the status of companies they engage.

'Appropriate'

And while the full bill – visible only after some time this afternoon due to broken page links on HMT’s website, reaffirms the 'small company' exemption, there is no mention of the many recruitment agencies that stand to be affected.

Reassuringly for contractors’ time-pressed partner business however, the Treasury stands by HMRC’s tentative backing for what industry has denounced as blanketing.

“Applying a decision to a group of off-payroll workers with the same role, working practices and contractual conditions can be appropriate in some circumstances,” the government says on page 16 of its response.

'HMRC is clear'

“However, HMRC is clear that it is not right to rule all engagements to be within or outside of the rules irrespective of the contractual terms and actual working arrangements.”

But blanketing apparently won’t be a problem anyway, contrary to what a leading barrister has suggested.

Officials claim: “Evidence from the introduction of the reformed off-payroll working rules in the public sector shows that most public authorities are making assessments on a case-by-case basis and there is no evidence of blanket determinations.

“No evidence was provided in this consultation to support the suggestion that blanket determinations will be a particular problem in the private and third sectors. All organisations are required to take reasonable care in making their decisions”.

'Not a template'

The wording – which could be lifted straight from what the Treasury said in 2017 in relation to the public sector IR35 reforms, vindicates the prediction of Qdos’ Seb Maley.

Speaking just before the bill’s publication, the IR35 adviser said he ‘did not imagine that HMRC would use too much imagination in drafting the new rules.

Although he has now been proven right, it is at odds with assurances by the Revenue’s Jim Harra, whose evidence to MPs in March was that the 2017 IR35 reform was ‘not a template HMRC can simply stick onto the more diverse commercial sector.’

'Huge'

The Association of Independent Professionals and the Self-Employed sounds more than a little disappointed. “Extending these rules [from the public sector] will put a huge extra burden on organisations which depend on the use of highly-skilled flexible workers to help them succeed.

“With such short notice,” IPSE added, “the Treasury has left businesses to choose between access to the skills they desperately need and trying to rush implementation of rules even HMRC itself doesn’t understand.”

The association was referring to HMRC being on losing streak with IR35 tribunal cases – tried under the legislation of 2000, most recently with a loss to Talksport presenter Paul Hawskbee who it wrongly found inside IR35.

According to tax consultancy Markel, that legislation now has a modern successor of equally great significance: “Draft legislation on the private sector…herald[s] the biggest shake-up in the IR35 rules since their introduction almost 20 years ago.”

You can discuss this draft legislation, the consultation responses and the respective publications on the ContractorUK Forum.

A sense of panic among contractors’ private sector engagers, compounded by fears HMRC isn’t doing enough and so can’t be relied upon, has set in -- 230 days until IR35 reform bites.

“As the enforcement deadline creeps closer, cracks in the business community's preparedness for the change are starting to show,” says law firm Fieldfisher.

“In particular, many are anxious about how work delivered through complex chains of different entities can be made fully compliant with the new rules.”

Those cracks appear to be at risk of deepening now that an HMRC update – containing “guidance and support” for affected businesses – has failed to materialise.

In fact, despite engagers being promised that HMRC would hand them an education “package”, the assistance now appears late given that it was due by “summer 2019.”

'Surprise and dismay'

Even if it were to emerge before September arrives, the HMRC package already sounds inadequate compared to what engagers want, implies Fieldfisher employment partner Ranjit Dhindsa.

“A number of those [engagers] who stand to be affected by IR35 [reform] have expressed surprise and dismay that HMRC has not launched a mass awareness…campaign”, she said.

“[Or a guidance campaign] about the changes to off-payroll working rules, [as the engagers] fear being tripped up by inaccurate hearsay.”

'HMRC isn't doing enough'

Even HMRC now contacting medium and large organisations affected by the changes is, like the promised guidance package, ‘too little, too late,’ according to status advisory Qdos.

“With April 2020 rapidly approaching, this should have happened months ago,” says the advisory’s Seb Maley. “HMRC isn’t doing enough to support the private sector as it prepares for IR35 reform.”

The adviser suggests that the support has been lacking almost from the outset, notably when the Revenue tried to use its consultation response to address industry’s big concern -- liability.

'Red herring'

“All the complex flow charts documented in the IR35 consultation were a bit of a red herring really, and failed to explicitly state which party would be on the hook if a status decision was overturned,” Mr Maley said, adding:

“And are letters -- which HMRC has apparently started sending out -- going to do the trick? Arguably not. Therefore, my advice to private sector companies is not to rely on HMRC for genuine help when getting ready for reform.”

Accountancy firm Grant Thornton is among those who hope the advice is heeded, as it has launched an IR35 status tool “more comprehensive” than CEST, and using Artificial Intelligence.

Built to produce a decision every time, alongside a ‘risk rating’ to highlight the potential for challenge, the tool comes at a time when ‘pressure on the engagers of contractors’ is being exerted.

'Time-consuming and complicated'

The firm also said that the tool has been programmed with its advisers’ knowledge about assessing the IR35 status of workers. At Fieldfisher, Ms Dhindsa issued some of her own.

“Companies should ensure that individual [contractors] do not appear in their organisation charts, have company email addresses, use company stationary or computer systems free-of-charge, as these all strengthen the argument that a worker is an employee, rather than a contractor.

“[And] although it is often time-consuming and complicated, companies should always assess the impact of IR35 on a case-by-case basis, rather than adopting wide, blanket determinations for workers.”

She added: “Such approaches can leave businesses open to challenges from individuals unhappy about their determinations and also from HMRC, which may disagree that all workers should be given the same classification.”

'Better at the time'

Yet it is HMRC’s disagreement in July 2018 with almost all accounting, legal and status advisers about MOO being excluded from CEST, which was yesterday exercising experts.

In particular, while the Chartered Institute of Taxation outlined to the Revenue at the time -- more than a year ago -- why Mutuality should be included in CEST, the CIOT says it was asked not to disclose that it did so until this month.

CIOT Member Graham Webber, tax director at WTT Consulting reflected last night: “Whilst the CIOT view is to be welcomed, it would have obviously been better to have shared this in real time and before the draft Finance Bill, now before parliament, became a reality.

“I suspect it is HMRC who insisted that a view contrary to own, discussed perhaps six months ago and reduced to writing 4 months ago, was delayed from publication.”

'Well before'

Writing on LinkedIn, Mr Webber said a better balance was needed between confidentiality and, in light of only 32 weeks to go until the off-payroll tax applies, “public concern.”

His comments come as an update to CEST, promised by HMRC in wake of the criticism about it omitting MOO, remains unscheduled, despite an appeal on behalf of enterprise that it needs to be live “well before” April 6th 2020.

Most PSC contractors know by now that from April 6th next year, they will lose the right to set their own IR35 status -- that is unless they work with a ‘small’ company in the private sector, writes Seb Maley, chief executive of Qdos.

Much like in the public sector following similar reform in 2017, from April 2020, the responsibility for determining a contractor’s IR35 status will transfer to the end-client, with the liability also shifting to the ‘fee-payer’ in the supply chain.

Given the chaos that arrived after public sector changes were enforced two years ago, resulting in thousands of risk-averse IR35 decisions, contractors are understandably concerned about the prospect of further reform next year.

Many independent workers fear their clients -- irrespective of the fact that these are fairly substantial companies -- do not have a strong enough grasp of the IR35 legislation to make well-informed decisions regarding tax status and will instead prioritise ‘inside IR35’ determinations to protect the liability they will often carry.

However, amid the changing IR35 landscape there are two important factors contractors should take into account:

1. Despite reports that several firms will make blanket IR35 decisions, through the work we are carrying out in the private sector, we are confident that ‘outside IR35’ opportunities will continue to exist after the introduction of the April reform.
2. Despite not having the power to set IR35 status, that’s not to say a contractor cannot influence the outcome of this decision.

Focusing on the second point, and to help contractors safeguard their IR35 status, we’ve identified several factors to bear in mind as reform looms. They are preparations, of sorts, you can employ if you’re a limited company fed up with waiting for the other shoe to drop.

1. Take the initiative

In the event that your client or recruitment agency hasn’t been in touch regarding IR35 changes, you can take the initiative and reach out to them with a view to discussing their plans for reform. With a clear idea of how your client and agency intend to administer IR35, you will be in a position to decide whether you want to continue working on that specific contract post-April 2020 or source one with an engager that will assess status accurately.

2. Communicate with your fellow contractors

The saying ‘two heads are better than one’ is certainly applicable here. As a contractor, it’s well worth getting in touch with other independent professionals working with the same client to find out if they have held any talks with the engager about IR35.

Consider approaching your client together as a group to stress how important it is that they prioritise well-informed status decisions. If a business understands the implications that blanket IR35 assessments, for example, will have on its ability to attract contractors, there is a chance that it will reconsider its approach.

3. Confirm your arrangements

Explore the possibility of securing a Confirmation of Arrangements (CoA) document. Signed by your client, a CoA effectively confirms that all parties in the supply chain (including the recruitment agency), are in full agreement of a contractor’s IR35 status.

Granted, a CoA could be tricky to obtain, given it will soon be the client who carries the liability -- much like in the public sector. That said, should you achieve this, theoretically it will become difficult for your client to change your IR35 status on or after 6th April without good reason.

4. Prioritise ‘substitution’

The right to provide a substitute in a contract is often focused on in IR35 investigations. And while one factor on its own doesn’t typically deem you inside or outside the scope of the legislation, it’s worth ensuring your contract has a genuine right of substitution. Better still, actually exercising this right to provide an able substitute will strengthen your case for belonging outside IR35.

Given engagers are being advised by HMRC to use the taxman’s very own CEST tool - which will wrongly automatically class a contractor inside IR35 if there is no substitution clause -- it’s important to ensure your contract allows for this.

5. Stay aware of ‘Control’ and ‘MoO’

While Substitution is important, that’s not to say you should ignore two of the three other key status tests, Control and Mutuality of Obligation (MoO). To ensure you have the best possible chance of being considered outside IR35, it’s also crucial that you are able to show you are not under the direct control of your client, and there is no mutual obligation for the client to provide paid work and for you to accept it.

6. Seek independent advice

To strengthen your IR35 position, consider having your contract reviewed by an IR35 specialist, who will be able to offer objective advice. Armed with an in-depth status review carried out by an expert with no financial gain on the outcome of the assessment, you will be better placed to head off any potential risk-averse decisions that might be made by your client.

7. Demonstrate you run a legitimate business

Make it clear that you operate as a legitimate business -- an important, albeit not typically definitive factor taken into consideration when determining IR35 status. From taking out business insurance to having your own office address, company website and even stationery, it’s vital that you’re able to demonstrate to your client and, if required, HMRC, that your company is not a vehicle used to disguise employment.

Final thought

As the clock ticks down to the arrival of private sector reform, it’s important that you take these steps in an attempt to protect your IR35 status regardless of the fact that from next April you will not be the party tasked with setting it.

Every individual MP is being asked to oppose next year’s changes to IR35, in a mass letter-writing campaign backed by ContractorUK and ten other supporters of contractors.

Italicised below, the letter urges MPs to take three actions, including asking their party’s leader to pledge in their manifesto, “should there be a general election,” to stop the changes.

'Very timely'

“With an election seemingly going to happen,” a campaign spokesman said yesterday after Labour backed the Tories to have a mid-December election, “these letters are very timely.”

In them, MPs are asked to not only oppose a rollout of the IR35 changes (made in 2017 in the public sector), but to also back a review into the tax system’s treatment of contracting.

The changes to IR35 are that rather than set their own status, limited company workers will lose the right to the large or mid-sized companies that hire them, who will set status for them.

But to avoid having to decide status for every contractor they hire, and follow the associated procedures, more and more engagers say they will simply not take on such workers anymore.

'Domino effect'

ContractorUK revealed back in May that HSBC was the first engager to adopt this ban on Personal Service Companies, albeit since September, ahead of the changes from April 2020.

But this anti-PSC policy, or ‘cease and desist’ stance on PSCs has since been copied by M&G Investments, Morgan Stanley, Barclays, Lloyds, GSK, Tesco Bank and RBS.

It is a ‘domino effect’ which the MP letters warn on, partly because it looks set to lead to the elimination of thousands of freelance contracts. And that’s just one of the consequences.

“HMRC have admitted that 153,000 UK contractors will see a pay cut of around a fifth of their income, “ the letter informs the MPs, who are also warned that engagers who do keep their PSCs face a 14.3% stealth tax.

The letter adds: “Companies have begun telling [their] contractors that they will have to either move onto PAYE or work through third-party umbrella companies which means a projected pay cut of up to 30 per cent.

“So this flawed policy is already damaging contracting and denying UK businesses access to the skilled flexible workers they need, even before actually being introduced. This flies in the face of repeated claims by the government and HMRC that the Off-Payroll Tax will not affect the genuinely self-employed”.

'Single, strong voice'

Asked about the intention of writing to every individual MP, a campaign spokesman said:

“The aim is simple, to be a single, strong [voice] on behalf of contractors and the sector to try to stop the off-payroll [rule] roll-out. [It’s] something that with the [current] political turmoil, remains a real possibility.”

Speaking last night, letter signatory LCAG said: “More and more MPs are waking up to what the current government are doing -- attacking the UK’s flexible workforce, first of all through the draconian Loan Charge and now by the unfair off-payroll tax.

“It’s time that all contractors and freelancers made a stand and made clear that the war on contracting must stop. The loan charge scandal has cost lives and destroyed business, and the off-payroll [rules] would make this even worse.

“In the forthcoming general election, all contractors should only vote for candidates who promise to end and investigate the loan charge scandal and halt the damaging off-payroll [framework] extension”.

The full text of the letter to MPs, which ContractorUK and fellow signatories like WTT Consulting also use to ask them to support a pause to all HMRC activity related to Loan Charge 2019, is below:

Dear Member of Parliament,

As eleven organisations from the UK’s important contracting and freelancing sector, we are writing to Members of Parliament, as a matter of urgency, on behalf of the UK’s important flexible workforce and economy. We are writing to you to ask you to oppose the Government’s flawed and damaging plans to introduce the Off-Payroll Tax (IR35 ‘off-payroll rules’) to the private sector, despite the damage it has already done to the public sector.

The UK’s flexible workforce is hugely important to business and to the economy, yet the Treasury (guided by an out-of-control HMRC) are attacking and seriously damaging this sector in what has been called a ‘war on contracting’.

We are writing to you as a matter of urgency because the proposed roll-out is already creating havoc in the UK’s contracting sector – with a series of large firms announcing that due to the Off-Payroll Tax they are laying off contractors.

The Off-Payroll tax, due to be introduced in the next Finance Bill, is a new 14.3% double stealth tax burden on firms that hire contract workers. Firms will simply not pay this very significant additional cost, so this in reality will mean significantly lower rates of pay for thousands of people. HMRC have admitted that 153,000 UK contractors will see a pay cut of around a fifth of their income.

To avoid the proposed new tax, Barclays, Lloyds, GlaxoSmithKline and HSBC have announced that they will cease all engagements of self-employed workers who have for decades provided services and whose skills many large businesses have relied on. These companies have begun telling its contractors that they will have to either move onto PAYE or work through third-party umbrella companies which means a projected pay cut of up to 30 per cent.

So this flawed policy is ALREADY damaging contracting and denying UK businesses access to the skilled flexible workers they need, even before actually being introduced. This flies in the face of repeated claims by the Government and HMRC that the Off-Payroll Tax will not affect the genuinely self-employed and that the controversial change won’t damage business and the economy, when it’s now clear that it already is.

If the Off-Payroll Tax does come in, then thousands of contractors will be asked to pay taxes as an employee, many without getting the benefits of employment such as sick and holiday pay and a pension contribution. Others will simply be told they are not wanted and struggle to find work. Some highly skilled contractors are reporting they will emigrate as a result.

Other firms are already actively looking to move to using offshore workers, as opposed to British based workers, to avoid the changes and costs altogether, meaning HMRC will not receive any tax at all, which shows how ill-considered and perverse the policy is.

The proposed Off-Payroll Tax is already affecting contractors facing the Loan Charge (or who are already paying large monthly payments to avoid it), some of whom face losing their job and income. So the inevitable outcome, if it isn’t stopped, is that some people currently paying ‘time-to-pay agreements’ to HMRC will be unable to continue to pay, as a direct result of this latest Government policy. This is extraordinary and perverse and shows the vindictiveness of HMRC in unfairly pursing self-employed contractors for imagined underpayment of tax, but also the destructive nature of their whole approach, as one policy will make another policy outcome impossible. Far from raising taxes, this will destroy contracting and damage business.

Despite all this, the Government is hell-bent on rolling out the controversial Off-Payroll Tax and have included it in the Draft Finance Bill. It’s clear that the Government is listening only to HMRC and have ignored their own consultation findings and are now ignoring evidence of the damage already being done.

With the current political turmoil and the increasing opposition to the damaging changes in Parliament, we know that these damaging plans can be stopped if enough MPs raise this. So we are asking for you to persuade the Government to drop these damaging plans and instead commission a review as to how to best recognise self-employed workers in the tax system”.

We also ask you to push the Government to suspend all activity related to the draconian Loan Charge, which is causing an unprecedented mental health crisis with many families facing losing homes and livelihoods and with a serious risk of further suicides. It is scandalous that despite the seven known suicides, Ministers have so far failed to heed calls to do this.

So we, as organisations who either represent contractors and freelancers, or who operate in this sector, are urging MPs to support the UK’s flexible workforce by:

1. Opposing the roll-out of the Off-Payroll Tax and voting against it being included in any Finance Bill.

2. Support a non-Government/HMRC led review (like the Taylor Review of Modern Working Practices) to look at how best to recognise contracting and freelancing in our economy and the tax system.

3. To ask your political party to commit to do these two things in their manifestos, should there be an election.

4. To call for an immediate suspension of all HMRC activity related to the Loan Charge.

The support of hundreds of thousands of such workers, recruiters and businesses as well the wellbeing of thousands of British families depends on this and we urge you to support your affected constituents, business and the UK economy.

Following the glitziest contracting awards ceremony last night that contractor industry veterans say they have ever attended, ContractorUK is delighted to announce the winners of the inaugural Contracting Awards 2019.

But first, and before revealing the ‘best of the best’ contractor service providers in 17 categories, thanks go to an incredible list of the London event’s sponsors, who mirror the sheer diversity of UK contracting.

They are umbrella company Select Umbrella; cloud accountant FreeAgent, PAYE & accounting firm Orange Genie, mortgage experts Freelancer Financials, agency In-House Recruitment, Blockchain specialist APPII, and niche jobs site Technojobs.co.uk.

These seven businesses were among the 200 awards’ attendees who yesterday evening packed out the prestigious Grand Ballroom in the Montcalm Hotel, near Park Lane by Hyde Park, to enjoy three courses of fine dining, accompanied by wine and sparling drinks.

On top of applauding the wit and irreverence of compere Josh Widdicombe (Live at the Apollo, Mock the Week), all 200 put their hands together for the following winners, decided by awards’ judges Seb Maley of Qdos, Julia Kermode of the Freelancer & Contractor Services Association and Anthony Sherick of ContractorUK.

With 2020 and the arrival of controversial private sector IR35 reform in April nearly upon us, it’s important to take a moment to reflect on the past 12 months which have got us to where we are now, writes Seb Maley, CEO of Qdos Contractor.

When focusing on IR35 in 2019, this year has been eventful to say the least. Dominated by uncertainty, HMRC losses and noble lobbying against the arrival of next April’s reform, this year we’ve seen the good, the bad and the downright ugly on the IR35 front.

The ‘good’ being government promises to hold a review into IR35 reform, and the fact that private sector companies are preparing to engage contractors outside IR35, despite worrying reports of blanket decisions.

The ‘bad’ being Westminster's insistence that public sector changes to IR35, introduced in 2017, have been a roaring success.

And the ‘ugly’ being HMRC’s various and failed attempts at claiming genuine contractors are inside the legislation and insisting that short-sighted IR35 reform will be introduced on April 6th.

In between and relating to these three, there have also been a number of important developments in the year nearly gone. So, as we stand on the brink of private sector IR35 reform, let’s take a final look at what’s now behind us.

Public sector problems remain

While not limited to the start of 2019, the impact of the public sector’s IR35 changes was made apparent. Blanket decisions, which arguably defined reform in 2017 are still being made. This leaves contractors with no choice but to work inside IR35 or face having their contract cancelled.

HMRC has been of very little help, which is of no real surprise. Asked to stamp out blanket decisions, which are not compliant, the taxman explained that role-based determinations - which is when two or more contractors with ‘identical Ts &Cs’ can be assessed as one - are allowed.

This grey area in the legislation has done little to stop blanketing in the public sector and, as we approach private sector IR35 reform, hasn’t deterred several banks from stating that all contractors will be forced into PAYE arrangements before April 2020.

HMRC targets BBC presenters

Again, while HMRC opening up IR35 enquiries into more than 100 BBC presenters started well before 2019, a number of cases concluded this year. Perhaps most notably, Joanna Gosling, David Eades and Tim Willcox, lost their battle with the taxman, despite being made to work as contractors by the broadcaster. As a result, the trio was left to foot a £200,000 - £300,000 tax bill, which the BBC is rightly looking into helping them settle.

After Christa Ackroyd lost her appeal in October this year, it’s likely to be the last tribunal involving BBC presenters, as we head into 2020.

HMRC’s woeful record continues

The taxman showed no sign of changing in 2019 and continued to go the distance in IR35 cases which, upon closer inspection, he had little chance of winning. This year, HMRC won just one IR35 tribunal outright - which was the clear-cut BBC case where the presenters had been made to work as contractors. There was one split decision while the taxman who, let’s not forget, created, enforces and insists on reforming the legislation, lost three. These were defeats to ITV presenters, Lorraine Kelly and Helen Fospero, along with Talksport presenter, Paul Hawksbee.

What does this tell us as we approach Off-Payroll Working in the Private Sector in a few months’ time? Aside from the fact that HMRC wants to win high-profile cases and still cannot fully grasp the legislation, that the taxman is aggressive and on a mission to raise revenues -- granted, not something we didn’t already know, but worth bearing in mind given HMRC can investigate contracts up to six years old.

HSBC sparks bank blanketing

HSBC was one of the first banks to knee-jerk to private sector IR35 reform -- quite early in the year, stating that it will no longer engage PSC contractors outside IR35. Other financial services companies that soon followed suit were Lloyds, Barclays, RBS, Morgan Stanley and M&G Investments. Needless to say, this short-sighted and risk-averse approach has panicked contractors, who were already questioning whether they will be able to operate outside IR35 when reform arrives on April 6th.

While concerning, it should be pointed out that policy decisions like this - and being forced to work through PAYE arrangements - aren’t representative of the entire private sector. Through the work we’re carrying out with over 100 private sector outfits, we’re confident that tens of thousands of outside IR35 opportunities will exist beyond April 2020.

Off-Payroll consultation and response

In the summer, HMRC invited IR35 stakeholders to have their say on the incoming reforms. On the whole, sector experts’ verdict was that changes are unnecessary and until HMRC wakes up to the reality that public sector reform resulted in many inaccurate decisions, private sector changes to IR35 mustn’t go ahead. From CEST’s failings to the unfair appeals process, the argument against the introduction of reform was a strong one.

Predictably, the government, with the tax office in tow, disagreed. Despite promising to listen to the advice of specialists and contractors, who have suffered first-hand the public sector IR35 experience, Westminster remains blinkered and committed to enforcing the changes.

Draft IR35 legislation arrives

The draft IR35 legislation was published in July and, as expected, resembles THE public sector reform in the most part. Aside from the exemption of ‘small’ companies, along with the planned introduction of a ‘status determination statement’ (which end-clients will show contractors and agencies to explain their reasoning behind an IR35 decision) and the ‘client-led disagreement process’ (designed to help contractors dispute decisions), the draft IR35 legislation was uninspiring, to say the least.

IR35 reviews promised

IR35 has made national news throughout the year, meaning politicians have had no choice but to start paying attention to the issue. In the run up to last week’s general election and Boris Johnson’s landslide victory, each major party had its say on the incoming IR35 changes.

The Liberal Democrats promised a review of IR35 in its manifesto, as did the SNP. Labour said it would ‘consult’ on IR35 reform, although there was no mention of the legislation in its manifesto and the party did not release an official statement. Meanwhile, the Conservatives - perhaps after recognising that the Liberal Democrats were reportedly on the cusp of winning the support of contractors - also pledged to review IR35.

While a review is certainly a step in the right direction, that the Conservatives were late to the party is a worry. And understandably, contractors remain sceptical. Will a review be genuine, or has it been floated simply to win the support of independent workers who have been let down by the government in recent years? Only time will tell.

Let’s not forget either that a review doesn’t mean reform will not go ahead. With only a few months to go until these significant changes arrive, the government must get to work and consult on IR35 immediately in the New Year of 2020. Even then, that leaves precious time for the rules to be scrapped by April 6th.

Therefore, as we head into 2020 - a huge year for our sector - contractors must work off the basis that reform will be introduced, despite the belated promise from the government to examine the true impact of the changes.

AS PART OF A REVIEW INTO CHANGES TO THE OPERATION OF THE OFF-PAYROLL WORKING RULES (IR35), HMRC HAS MADE AN ANNOUNCEMENT TO GIVE BUSINESS MORE TIME TO PREPARE.

Changes to the operation of the off-payroll working rules will only apply to payments made for services provided on or after 6 April 2020, HMRC has announced today ahead of the publication of the government’s review.

The formal publication of a review into the implementation of changes to the off-payroll working rules is due to conclude in February.

A common issue raised over the course of the review has been businesses’ concerns over what payments the rules apply to and from when. The government has listened and taken action early to give businesses certainty and more time to prepare to ensure the smooth and successful implementation of the reforms that come into force in April.

The rules, also known as IR35, will now apply only to payments made for services provided on or after 6 April 2020. Previously, the rules would have applied to any payments made on or after 6 April 2020, regardless of when the services were carried out. It means organisations will only need to determine whether the rules apply for contracts they plan to continue beyond 6 April 2020, supporting businesses as they prepare.

This is set out in updated guidance in the Employment Status Manual.

The off-payroll working rules have been in place since 2000. They are designed to make sure that an individual who works like an employee, but through their own limited company, pays broadly the same Income Tax and National Insurance contributions as those who are employed directly.

The government is extending the 2017 reform of the operation of the rules in the public sector to all medium and large organisations in April 2020. This will shift responsibility for operating the rules to the organisation that engages the worker. This is how employment status for tax is decided for the vast majority of people, who do not work through their own company.