With only a matter of weeks before the public sector IR35 reforms are set to come into force, public sector bodies have been thrown into turmoil. Just recently Transport for London attempted to put a blanket ban on hiring limited company contractors but Contractor Calculator has learned that TfL is considering a partial U-turn on its decision after realising the impact it will have on its organisation and the smooth running of London’s transport system.
Dave Chaplin is CEO and founder of ContractorCalculator, an online website that is the expert guide to freelancing and contracting and here are the steps he suggests public sector bodies take before hiring contractors and freelancers:
IR35 status should be tested now
HMRC is developing an online HMRC’s Employment Status Service (ESS) tool in order for public sector bodies to test the status of its contractors. And the taxman is encouraging mass adoption of the tool amongst public sector clients.
However, this tool poses a serious threat to any public sector contractor, because in many cases it will falsely imply that a worker should be classed as caught by IR35, contrary to case law. The criterion for a pass result is expected to be so tight that only a handful of contractors will achieve an outside IR35 status.
The tool is not expected to align with IR35 case law, and is based on HMRC’s biased view of how the legislation should be applied. As a result, thousands of legitimate contractors will be wrongly classed as inside IR35 and could risk paying out huge amounts of unnecessary tax.
HMRC is yet to claim that it will even be bound by the tool’s outcome. HMRC’s constant referral to the tool in its technical note also gives the impression that the tool is the only means of ensuring compliance. This isn’t true. Hirers should be aware that they are not legally bound to use it.
ContractorCalculator’s solution, ir35testing.co.uk, will provide contractors with an instant assessment on their pass/fail status. Already used by over 100,000 contractors since it was first built in 2009 it provides the most comprehensive and in-depth evaluation available today.
Communicate with contractors to keep them outside IR35
Once each contract has been IR35 tested hirers can make an informed decision about allowing contractors who have passed to continue working via their limited company on the same terms as before.
For anyone who fails the test, hirers can consider amending the contract and working arrangements to minimise the IR35 risk. Clients would be advised to work with an IR35 legal expert to negotiate any changes and make the right amendments. If an outside-IR35 contract cannot be negotiated, a contractor could work through an umbrella firm as an alternative.
Plan for departures
Contractors will not want to remain in an ongoing contract that has suddenly changed from outside IR35 to inside IR35.
On top of the additional tax burden, the threat of a HMRC investigation targeting them for back taxes is too great. It’s far more likely that they will turn down the contract and move to the private sector where the reforms don’t apply.
Prepare to defend yourself
If HMRC decides at a later date that any contractor processed as outside IR35 should have been inside IR35, it will chase unpaid taxes, first from the agency, who may then move up the chain to the organisation that made the wrong IR35 status decision, meaning the hirer could be liable for all that extra tax.
This is why it’s essential to build up a body of evidence to prove that any contractor hired is outside IR35 should the taxman ever make a challenge. ir35testing.co.uk offers a pass certificate along with a comprehensive report to support each decision.
For anyone concerned about the tax risk of processing certain contractors as outside IR35, there are also various tax liability insurances available.
Take action now
The reforms represent a potential car crash for all public sector firms that hire contractors, and the time to act is now!
Contractors are already considering a future outside the public sector sector. Hirers and their advisors need to be doing all they can to keep them outside IR35, or else risk losing them and the vital skills they bring.
The first step is to ask them to take a free IR35 test available at IR35Testing.co.uk.