10.03.2020

IR35 – the final furlong

(This article was written and posted shortly before the government announcement on 17 March 2020 that in response to the coronavirus crisis they were deferring the implementation of the new IR35 legislation until April 2021. While many of the immediate issues identified in the article have therefore gone away in the short term, we hope that some of the overriding themes remain useful for clients as they prepare for the new transition timetable.)

With less than a month to go before the changes in the rules surrounding off-payroll working (IR35) come into effect, we might all have hoped that by now planning would have been completed and the future landscape would look clear. But while arrangements in the insurance sector have been gradually falling into place, both in general and for individual contractor engagements, there remain plenty of unknowns and we’re still seeing changes to, and departures from, companies’ policies as the impact on individual projects starts to hit home.

In this article we provide commentary around what we see as the key current issues, from a client perspective, as we approach the date of the changes. The article assumes a good understanding of the essentials of the legalisation – for more details around the changes themselves please see our previous two articles[1].

While understandably the upheaval created by the changes has been unwelcome, on a more positive note APR’s success over the last decade or more provides evidence if needed that a PAYE model works. Demand for our staff has increased over the last months as clients seek certainty over supply while retaining the flexibility they have come to expect in the interim market, and we remain confident that the actuarial contract market will continue to flourish.

What’s the latest from the government?

In the lead-up to the December election there was talk among all the political parties of reviewing the legislation once in government. Long before the new government had its feet under the desk, though, it was clear that this review would be limited to trying to smooth the transition rather than any significant change in the direction of travel (the government’s own press release[2] in January stated that the review “will determine if any further steps can be taken to ensure the smooth and successful implementation of the reforms”).

Since then there have been two interventions of note from the government:

On 7 February HMRC announced[3] that the changes would only apply in respect of services provided on or after 6 April 2020, as opposed to payments made after that date. Although HRMC’s claim that it had “listened and taken action early” felt a little disingenuous, overall this was a welcome change, which simplifies the transition, in that contractors aren’t now beholden to the processes of the Fee Payer to determine how close to the date of the change they can continue to work though their PSCs.

On 27 February the Treasury published the conclusions of the review[4] referred to above. As well as confirming the point on payments for services provided prior to 6 April, the main headline, which had been trailed in advance by new Chancellor Rishi Sunak, was to reassure the market that HMRC would not be heavy-handed in the first year: “Customers will not have to pay penalties for inaccuracies relating to the off-payroll working rules in the first 12 months unless there is evidence of deliberate non-compliance”. Although again this is welcome in tone, for many it sends a slightly confusing message.

One further interesting outcome from the review is that the government has agreed to “amend the legislation to exclude wholly overseas organisations with no UK presence from having to consider the off-payroll working rules”, which is helpful in addressing one of the more complex aspects and feels like a sensible approach.

A market view – clients

We seem to have followed something of a journey over the last six months or so, with clients initially unsure how they would approach the changes, then in many cases making blanket policy decisions and now at a point where some have started to reconsider these decisions.

Unsurprisingly, as the date of the change approaches many clients have started to struggle either to retain existing contractors forced to go down a PAYE route, or to fill new roles for the same reason. In some cases, this has led to a relaxation of the initial, and understandable, aspiration that any changes to on-payroll engagements should be done on a cost-neutral basis. However, the pressure to fill roles has also led to some clients either changing their policies or allowing exceptions to them.

Given the number, and in some cases critical nature, of engagements clients are having to work through, we sympathise with those having to deal with these issues. We hope the following observations are useful to clients as they make their final preparations:

Consistency is important. This is true both at a policy level and in treatment of individual cases. While it is entirely understandable for clients to review policy decisions in light of business needs and concerns over supply, any softening of policy should be done uniformly, in an organised way, rather than reactively just to meet specific pressure points. Where status determinations are being undertaken, it’s vital that managers feeding into the assessments are given sufficient guidance to ensure that those in working in similar situations are treated consistently and fairly, and that it can be demonstrated that due care has been taken in reaching the determination. Ultimately such determinations need to be able to stand up to any future legal challenge, and there is a considerable risk of creating problems in future where determinations are rushed or out of line with previously agreed guidelines.
Bear in mind that while contractual arrangements are relevant, they are not the primary factor. As the government’s review referred to above clearly states, “employment status depends on the facts and working practices of an engagement, not its legal structure”; simply changing the contract to fit more favourable answers in the assessment, without any change to the actual working arrangements is not sufficient. Substitution is a good example of this – it’s easy to add a substitution clause to a set of terms, but in reality, i) do contractors genuinely have available and appropriate substitutes, and ii) would you be willing to allow your contractor to send a substitute with little or no right of refusal? Similarly, adding a scope of work or a set of deliverables to an engagement is all very well, but it is of little value if the reality is that your hiring managers will continue to direct how contractors deliver their work, as we expect will be the case in many scenarios.
There are some aspects of the legislation that still aren’t completely clear. For example, many are using the argument that actuaries are “experts”, or have skills clients don’t have in-house, and that this is a good indicator that there is no supervision, direction and control. However, the legislation is far from unequivocal that this argument holds, simply saying that in the case of experts the lack of supervision is a far less important factor; this is backed up by the review document, which says that status “does not necessarily depend on, for example, […] specialist skills of an individual”. Our legal advisors have reiterated the point that it not the legal structure of an engagement (for example using actuarial experts), it is the facts and working practices of the engagement which dictate employment status.
Remember that where a status determination is undertaken there is a legal requirement that all parties in the contractual chain are entitled to see the output of this. While the legislation doesn’t go into detail on how much detail needs to be provided, spare a thought for your suppliers, who as the Fee Payer are bearing the liability in the first instance should an outside-IR35 determination prove to be incorrect. While there may be limited sympathy among clients for our view of the unfairness of suppliers having to accept this liability without being in control of the determination, it seems only reasonable to provide a clear rationale behind any determinations and allow suppliers (and others) proper right of challenge – unless it can be demonstrated that the determination is reasonable, suppliers may be unprepared to take the risk.

A market view – contractors

As expected there is a wide range of different views and outcomes from the contractor perspective, and it’s worth bearing in mind that this has been a particularly stressful period for many contractors, uncertain of how clients will be responding to the changes and facing a material drop in income in many cases (particularly where they incur significant travel to work expenses).

Most, but far from all, have reluctantly accepted that a move into some form of PAYE arrangement is inevitable, and have been prepared to draw a line and move on. Again, consistency is key here – it’s unlikely this level of acceptance will remain if they start to see colleagues in similar roles now being assessed as outside IR35 because clients are not applying policies consistently.

We have seen some contractors moving into salaried positions at clients, whether on a fixed term contract basis or into permanent roles. But as expected, this is not widespread, partly because of the issues it causes on the client side (budget approvals and potential impact on existing staff remuneration frameworks), but also a nervousness from contractors that moving straight into a salaried role at the same client may prejudice any retrospective investigation into previous IR35 status, despite the government’s stated intention not to undertake such retrospective reviews.

Assuming some form of PAYE arrangement is agreed, contractors need to decide whether to go onto the agency’s payroll (if this is on offer) or opt for the umbrella company route. There are some scenarios where operating via an umbrella company suits a contractor’s own circumstances better than being on the payroll of the supplier, but the majority of our contractors have taken the view that working as a PAYE agency worker of the supplier feels closest to the model of PSC contracting that they are used to.

On the other hand, plenty of contractors have taken the view throughout that these changes should not affect them and that their working arrangements are genuinely outside IR35, so have been more than happy to see clients starting to make more out-of-IR35 determinations – in some cases probably emboldening others to hold out for a similar outcome. Given the shift in liability for incorrect treatment away from the contractors themselves it is hardly surprising that many are taking this stance. Again, this serves to highlight the importance of clients and hiring managers making assessments based on actual working arrangements rather than simply what will produce the desired outcome, and clients need to consider the longer-term consequences of a lack of due care now.

From a wider perspective, given the ongoing level of M&A activity and regulatory change, it seems clear that there will continue to be a strong demand for a pool of flexible actuarial resource. So we are finding that although a few contractors are treating this as a trigger either to retirement or moving back into permanent work, most intend to carry on operating in the interim market, and in general are continuing to demonstrate the flexibility we have come to associate with this valuable section of the market.

To conclude

The last few months have been very trying, for clients, agencies and contractors alike, and temptation is strong to try to find a way out of or around the changes. However, unwelcome as it may be, our belief, based on our understanding of the legislation and our market, and supported by the legal advice we have received, is that the majority of engagements going forward are likely to be on a PAYE basis.

This view seems to have been shared by most clients, many of whom decided fairly early on to adopt a blanket PAYE-only policy. Although there are exceptions, our perception is that those clients that are retreating from this position are generally being driven by worries about ongoing supply to critical projects rather than a genuine change in understanding of the nature of these engagements or any alteration to the way the work is performed; in some senses the “light touch” message from the government has been an unhelpful distraction.

While we recognise that under a PAYE model there is the unwelcome combination of increased costs for clients and a higher tax burden for contractors, ultimately the insurance sector will continue to need to be able to call on short-term, flexible resource, and we believe that a pattern of this resource being provided by contractors working primarily on payroll, alongside a smaller number of roles that are genuinely outside IR35, will prove to be the most sustainable one.