Public sector bodies - 5 steps to take NOW to solve IR35 problems

Public sector bodies (PSBs) have been rudely awakened by HMRC’s news that contractor invoices paid after 6.4.17 will now be subject to the new IR35 rules, even if the work was completed prior to that date.

As CEO of ContractorCalculator I’ve spent a long time studying IR35 and it’s impact on contractors, and have the grey hair to prove it! As an ex-contractor caught in the IR35 crossfire in 1999/2000, having followed it for the last 17 years and then built a tool to assess status, I have a “unique set of skills” (you’ve seen the movie Taken, right?!). Our new tool, launched this week under IR35Testing.co.uk has leveraged those skills, and we are now able to deliver practical guidance to contractors and PSBs on how to avoid getting themselves into hot water. And offer initial assessments on a mass scale for free.

We launched on Monday last week and have already assessed hundreds of contractors. Our first contractor (who passed the test) had his report signed off by his client. The total cost to him to reach this level - ￡25. The cost to his client - ZERO. His client is now directing his contractors through the tool to see where they stand.

We are inundated with firms asking us to assess their contractors, and our white label solution launched for agencies and accountants is enabling them to service their clients and discover the level of risk faced on a project-by-project basis - again, all within hours. We can in theory assess the entire contracting market of circa 400,000 in an afternoon - for free. Diagnosis is free. You now only need to pay for intervention.

Right, with the sales pitch done…here’s what you need to do if you are a PSB faced with the dilemma of how to get through these IR35 reforms:

First, what is the problem? Essentially, all contractors need to be paid by 6 April 2017. After this date, a PSB has to prove that their contractors are outside of IR35, and show full due diligence on how this decision was made, or the PSB is obliged to deduct tax and National Insurance at source. So, if a PSB has contractors that are paid one month or more in arrears, invoices will have to be in by 6 March and paid by 6th April otherwise a PSB and all their contractors will receive a real financial shock.

As you can imagine, contractors trading outside IR35 won’t welcome this sudden tax hit, with many expected to walk away from contracts if they find themselves in this position. If you haven’t already done so, your PSB needs to start their compliance procedures NOW to mitigate this risk. For contractors paid a month in arrears, all contracts need to be IR35 tested prior to 6 March, which could mean (if you don’t have a test strategy) frantically testing contractors morning, noon and night to get this work completed.

We have a solution for you. There is salvation with these five easy steps for PSBs:

1. PAYE umbrellas - to help rule out the threat of a contractor walk-out you could temporarily place your limited company contractors in a Pay As You Earn (PAYE) umbrella solution. Ask your recruitment agencies to assist you with this.
2. Fee increase - your contractors may be highly unlikely to accept a temporary tax hike without protest and many will consider leaving. To protect your skills base, you could offer them a 20% increase to ensure they retain a similar level of net pay after taxes. Remember, this is only a temporary measure whilst you assess their contracts and that the costs incurred by ramping up contractor rates are an expense that’s necessary to retain their valuable skills.
3. Test for IR35 compliance - there are tools that can help but many are flawed (including HMRC’s own - which isn’t even released yet). Our original tool was used 100,000 times and has since been overhauled. It is FREE and will give you an accurate assessment in minutes. Take tests here: www.ir35testing.co.uk/takethetest
4. Don’t forget employment rights - engaging a contractor via an umbrella for more than 12 weeks means they will be eligible for certain employment rights under the Agency Workers Regulations (AWR). This will create additional costs for your organisation until testing has been completed.

• Negotiating contracts outside IR35 - only once your contracts have been individually IR35 tested can you make an informed decision whether to allow contractors who passed, to return to trading via their limited company on the same terms as before. If you have contractors who fail the test, you might consider (alongside a legal expert) amendments to the contract and working arrangements that can minimise their IR35 risk. If all this fails, you may wish to consider renegotiating with the contractor using an umbrella option.

If you have further questions or would like to discuss the above, please leave a comment below. Our free tool is quick to use, reliable and free. Visit www.ir35testing.co.uk/takethetest and see for yourself.

About Contractor Calculator - We’ve been online and independent since 1999. Still owned by founder and former IT contractor Dave Chaplin, the site has grown significantly since then to become the expert guide to contracting. Dave is still actively involved in its management, supported by a dedicated team of contractors and freelancers.