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A 'cloud of uncertainty' hangs over the future of IR35

As HMRC's private sector consultations get underway, recruiters will need to prepare regardless of..
A 'cloud of uncertainty' hangs over the future of IR35

If you work in contracting recruitment, for an umbrella firm, or operate as a contractor yourself, IR35 will not have been far from your mind over the last couple of years. From HRMC’s diktats and public pronouncements, the changes to this controversial piece of legislation forms a part of a wider movement to deter tax avoidance.

Despite HMRC's intentions, there has been kickback, with many claiming that the changes have limited the activities of commercial business with workers receiving less take-home pay and institutions having to stop project work as a result of contractors leaving. Whilst the changes are currently only applicable to the public sector, it is largely expected that they will hit the private sector soon. With a current consultation as to whether IR35 should be changed in the private sector running until 10th August, Recruitment Grapevine caught up with Seb Maley, CEO of Qdos Contractor, to get the rundown on where things stand.

 

Recruitment impacted by IR35 changes

Despite the Government’s insistence otherwise, recruitment costs have increased and placing contractors has become more challenging as a direct result of IR35 reform. APSCo's research shows 70% of recruiters have experienced a drop in contract placements since the reform, while 45% have reported increased charge rates from contractors, who quite understandably have raised fees to cover the cost of working inside IR35.

 

IR35 consultation is well underway

The Government are currently deep into the IR35 consultation on private sector reform, which is expected to be published later this month. The Treasury has promised to thoroughly review the implementation and subsequent impact of public sector IR35 changes. With chaos and inaccurate IR35 assessments continuing to affect the public sector, the Government would be unwise to extend reform to the private sector any time soon.

There is a cloud of uncertainty hanging over the future of IR35 currently which, for recruitment agencies, will be unsettling. That said, agencies are advised to prepare for private sector reform regardless, given that it seems like a case of when and not if.

It’s important that lessons are learned from the mistakes made following public sector reform, and agencies must be proactive in their approach to potential private sector changes, ensuring they carry out thorough assessments of each contractor’s working arrangement. 

 

CEST is still unreliable

The Government has stated it will support decisions made by CEST - HMRC’s IR35 tool - despite IR35 experts having raised credible arguments against the technology’s effectiveness.

The fact CEST assumes mutuality of obligation (MOO) exists in every contract counters IR35 case law and throws the reported 750,000 answers the tool has provided into question. Incidentally, 81% of contractors reported to Qdos Contractor that they would be deterred from working with a client or through an agency if CEST was the sole method of setting IR35 status.

HMRC is under pressure

HMRC have won just 17% of the past nine IR35 cases that went to tribunal, suggesting that the Government themselves can’t seem to understand the sheer complexity of the legislation they designed. This, of course, is ironic, but hugely concerning given The Treasury’s clear eagerness to extent IR35 reform to the private sector.

The solution?

With private sector reform seemingly coming next, it’s important for agencies to be aware that CEST is not mandatory, and independent IR35 assessments are perfectly acceptable. It also remains to be seen as to whether answers provided by CEST would stand up in court. The one-size-fits-all nature of the tool and the fact it does not take into account the unique details of particular working arrangements suggest it would not.

However, agencies that carry out an assessment of actual working practices in addition to IR35 contract reviews, will be in a stronger position to deal with potential reform.