Petition For IR35 (With Caveat!)

A picture of Darren, the CEO of Nudge Exchange
Darren Nicol

From the title your immediate reaction might be that I am “anti-contractor”. So, before I explain my view on IR35, I better start by saying that this is simply not the case.

I fully appreciate and recognise that the self-employed, contractors, freelancers, whatever label they are given, make a valid contribution and are essential to many businesses. They provide skills as and when they are needed and should be regarded highly for the flexibility and expertise they bring to an organisation. I truly believe that the way in which we approach work will change and we will all adopt a more flexible (contracting) approach to work. This is why providing clarity on IR35 and contracting is so important.

I come from an oil and gas background and with my start-up moving towards a tech focus, one issue I have noticed that is consistent across both sectors is the ambiguity and confusion that IR35 brings. What are the rules and when do they apply?

IR35 is a piece of legislation that allows HMRC to collect additional payment where a contractor is an employee in all but name. If a contractor is operating through an intermediary, such as a limited company, and but for that intermediary they would be an employee of their client, IR35 applies.

The legislation has been reviewed and is currently being updated. The amended version is due to be released later this Summer with an in-force date of next Spring.

This has caused a stir in the contracting community and a petition has gained over 20,000 signatures citing the legislation as “anti-business”. Many objectors believe it discourages “strivers” to give it a go. I believe; however, this is slightly misplaced.

IR35 is intended to distinguish the strivers from the disguised employee and any changes should, in my opinion, be welcomed as clarity is much needed. The current legislation is based on the case of ‘Ready Mixed Concrete (South East) Ltd v Minister of Pensions’, and there are numerous factors that need to be considered when determining whether IR35 applies or not. They are:

1. Substitution: if you are absent and you are obliged to send a replacement then generally IR35 would not apply.

2. Mutuality of obligation: mutuality of obligation is a concept where the employer is obliged to offer work, and the worker is obligated to accept it, in which case IR35 would apply.

3. Control: what degree of control does the client have over what, how, when and where the worker completes the work? If the worker is responsible for what they do, then IR35 will likely not apply. If, however, it is dictated by the client, then it probably would apply.

There are tests that can be taken to determine status, one of which has been provided by the Government and there are others provided by legal firms: -

IR35 Testing

Employment Status For Tax Purposes

Even with these tests as guidance it can be quite challenging to determine if it applies or not and the Government’s CEST system has been criticised for getting circa 40% incorrect. If you are in this situation then ask yourself a simple question, are you confident you are compliant with IR35? In my experience, the answer would normally be ‘I think so’. I feel that a review and update of the legislation should be welcomed. Surely having clarity on whether you are compliant is better than only finding out when investigated by the HMRC?

Now for the caveat, the review is almost complete, but some industry commentators in both the IT and oil and gas sectors have said that concerns raised have gone unaddressed.

Those commentators believe that the Government’s priority is to simply shift the responsibility for determining whether IR35 applies from the contractor to the client – and that nothing else will change.

On the flip side, I received an e-mail recently from a former colleague in oil and gas and they felt the feedback they provided to HMRC had been well received and appropriately addressed.

There will always be critics and different viewpoints, but in my view, the Government must take this opportunity to provide certainty and clarity, and not simply transfer responsibility to business.

So what for the future? Ultimately there will be those out there that stray into staff territory and will be faced with a decision of going staff or staying contract. The choice is still the same, however, the outcome will not be. Staff will mean you work for one organisation with the organisation determining work flow, time at the work place and providing the equipment needed to execute your duties. So no real change there then.

Where as ‘going contract’ will likely mean enforcement by the employing business which it is hoped (by HMRC) will deter the contracting of disguised employees. Those striving to do their own thing, sourcing and delivering work/ projects and taking on the risks that come with it, can still do so. They will, in my view, rightly be afforded the ability to pay tax as a business and not as an individual (risk and reward and all that) but things are still likely to change.

In my humble opinion it will lead to individuals providing their own equipment (or leasing from employing business), contracts being more specific and time bound, and greater movement of these specialist resources across the companies within industries. I don’t think these are necessarily bad things as it is what any other business would expect to undertake in order to provide a service, but it does increase the risks for the contractor as they will be treated more like businesses and less like individuals.

One risk of being treated like a business is when it comes to payment. The approach taken by some when it comes to paying SMEs in the oil and gas industry has recently been highlighted in Parliament. Some higher up the pecking order are constantly taking 90-120 days to pay their suppliers, which can and has left some bankrupt. Another is uncertainty. As a staff member work is generally supplied whereas for businesses the responsibility falls on them. This would be worrying for a one person outfit.

What is also clear to me is that the self-employed are currently under served as there is no go to source for work. It is currently word of mouth, or through networks of recruitment companies that take a handsome share for ‘placing’ candidates into contracts and for the longer, the better.

The current model is costly and inefficient, and I feel that with the change in legislation, the oil and gas industry lacks a place to provide contractors visibility of future scopes and somewhere to engage and undertake work contract transactions. If that place also removes the risk of non-payment then it could be the go to for the contracting community as it will allow the strivers to keep on striving. At Nudge that's where we feel there is an opportunity. We want to provide individuals with visibility of opportunities and to reduce the risks of being in business as freelancers. In doing so the individual can shape their work to their requirements and ultimately improve their life and wellbeing. Thoughts welcomed, namaste.

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