Possible scenarios facing contractors when IR35 reform is enforced

Many contractors are unsure about how private sector changes will play out

Contractors have shown huge resilience in recent years, having been impacted by reform to the IR35 legislation in the public sector in 2017 and, more recently, preparing to face similar changes which will be introduced in the private sector next April. 

There is understandably a lot of uncertainty surrounding the roll-out of further IR35 reform, which will see limited company contractors lose the right to determine their own tax status when engaged by medium and large businesses.

Having witnessed and experienced chaotic public sector reform two years ago, many contractors are unsure about how private sector changes will play out. Reports that several financial services companies will stop engaging contractors altogether has simply added to these concerns.

With this in mind, we’ve taken a look at several possible scenarios that could develop when reform lands on 6th April 2021.

You’re deemed outside IR35

News stories that Barclays, Morgan Stanley, M&G Investments, HSBC and perhaps even Lloyds are all planning workarounds to IR35 reform make the headlines but there’s no evidence to show that other firms will follow suit.

Given Qdos is helping more than 100 end-clients and recruitment agencies get ready for the introduction of changes, we are confident that plenty of private sector firms are quietly preparing for IR35 reform. Through our work alone, tens of thousands of contractors will have their IR35 status determined fairly.

The most likely scenario, and in our view the best outcome, is that engagers carry out assessments on a case-by-case basis, prioritising IR35 compliance over savings and simplicity. By making independent IR35 determinations, private sector companies will be able to manage risk and attract contractors going forward.

You’re blanket assessed

Blanket determinations, which automatically place contractors inside IR35, defined public sector reform. Given thousands of contractors didn’t have their status reviewed at all but were considered inside the legislation by risk-averse public sector bodies, independent workers fear a repeat performance in the private sector.

However, we don’t expect this to happen on the scale that it did in 2017. HMRC has confirmed blanketing is non-compliant and will result in an engager becoming liable for IR35, assuming they don’t already carry the risk.

In addition, businesses will be required to provide a ‘Status Determination Statement’ (SDC) which details the reason a particular decision has been made - this is a bid from HMRC to increase transparency and aid accuracy.

Meanwhile, contractors will also be able to challenge assessments through the ‘Client-Led Disagreement Process.’ Although given this is led by the engager, we advise you to have your IR35 status reviewed by an expert before approaching the client.

You’re subject to a role-based decision

In our opinion, a role-based IR35 assessment should be used only to provide a preliminary result. However, in HMRC’s opinion it’s perfectly acceptable to group any number of workers with contracts that have ‘identical terms and conditions’ under one status.

A role-based decision could be technically accurate of course, but it doesn’t take into account a contractor’s working practices, which reflect the reality of the engagement and therefore often hold the key in an IR35 investigation.

Should you be placed inside IR35 along with contractors who have ‘identical’ Ts and Cs, we advise you to review the reasoning behind the result. If the result has been obtained based on all key tests which ultimately relate to policy-level decisions (i.e. if the client would provide a substitute or not), your status is unlikely to change following a more in-depth review. However, if the assessment made was insufficient or you believe it to be inaccurate, you may wish to have your own status reviewed by a professional like Qdos and raise a dispute.

Your client makes an honest mistake

IR35 is a notoriously complex piece of tax legislation that many businesses might struggle to understand, initially at least. Therefore, you could be placed inside IR35 genuinely by mistake. 

Assuming this happens - and it’s by no means a given that it will - you’ll be told the reasons why your client thinks your contract is caught by IR35. With this information, you should be well-placed to challenge this decision. 

You’re forced onto PAYE

As seems to be the case with several financial services companies, some businesses might refuse to engage contractors. In doing so, IR35 would become redundant, given the legislation does not apply to umbrella workers or employees. 

However, this approach would mean these firms would no longer benefit from the skills, flexibility and - should cost be their main consideration - the financial benefits of compliantly engaging contractors outside IR35.

While news of businesses forcing independent workers into certain arrangements or handing them ultimatums are a cause for concern, it should be taken into account this seems to be the exception, not the rule. As our CEO, Seb Maley told The Register recently: “This is not a typical response to IR35 reform - nor do I expect it to become one.”

With over 25 years’ experience, Qdos is a specialist contractor tax, IR35 and insurance adviser and we review on average, over 2000 contracts every month. Since 2000 and the introduction of the IR35 legislation, we have handled more than 1,600 IR35 enquiries, saving UK contractors over £35million in tax.