IPSE warns of new IR35 risk with automatic switch to payroll

Last Updated: 13-07-2021

Reading Time: 16 minutes

Chris Bryce is chairman of IPSE, the association for independent professionals and the self-employed. Both he and the organisation he represents have new concerns over IR35 compliance.

Some of you will say: "That's nothing new; there's always some sort of IR35 risk." And you'd be right.

But there's a huge change taking place in public sector contracting. The new client-end responsibility for assessing contractor status, payroll or independent, is here.

We look at what the new rules imply for clients and contractors alike. And, perhaps of greater import, how contractors can face this new challenge.

Table of Contents

Synopsis: an overview of what's at stake

If a client has switched a contractor to payroll, PAYE can at best undermine their profitability. At worst, it can reinforce to HMRC that they're an employee, not independent.

Business-to-business relationships contractors build with agencies, clients and HMRC is all important. They've never been moreso.

Nurturing that relationship now also extends to the client.

Contractor clients may think they're saving time by transferring all outsourcing to payroll. But that, in real terms, is akin to biting the hand that feeds them.

Even in the NHS, there are only so many plasters they can apply. The hand that feeds has only so many fingers upon which paymasters can nibble. With regards to automatic payroll, prevention is better than cure for all parties involved.

What's changed for public sector contracts (and what hasn't)?

The way contractors work within the public sector has changed.

It’s not the work itself. Independent professionals still secure contracts through agencies and/or the end client.

What's changed is how public sector clients can choose to pay its hired professionals. Many contractors are still to address this relationship.

The potential punitive measures for not renegotiating contracts could be severe. Even following HMRC’s recommendations to the letter could land ostrich-theory contractors in hot water. Worse, inside IR35.

Few need reminding of the inherent dangers of following HMRC's IR35 advice. Chris Bryce paints an even gloomier picture of public sector contracting if contractors don’t act.

So, where do you start? Begin by renegotiating your public sector contract. Here’s why.

The imperative of renegotiating your public sector contract

Your first port of call: talk to your client or agency

If your contract straddles/straddled April 6th, 2017, take action. That was the starting date for new public sector rules.

Don't wait for your contract to expire or enter a natural extension period. Dunking your head in the sand won’t cut the mustard.

You must talk to either your end client or agency about the terms of that contract. That’s because it’s they who'll now decide whether their contract falls inside IR35 or out.

Nothing about the way you work need have changed. The way you submit timesheets and invoices needn’t be any different. Your rate may have remained consistent (you may want to 'up' it now, though).

It’s the new shift in decision-making that’s key to your livelihood here.

IR35 status: out of (your) control

Imagine you contract for a public sector client, such as the NHS. They now decide whether you’re inside or outside IR35.

They don't have to request an investigation by HMRC. They don't have to ask you if you want to switch to payroll. But they DO have to make the decision.

The repercussions of not renegotiating your contract could spell disaster for you. It could eradicate any benefits of operating on a business-to-business basis with that client.

Don’t assume that your agency has worked out the details of your contract on your behalf.

Pick up the phone and talk to them. It’s not they who’ll feel the brunt of punitive measures. It’s you, your business and your way of life at stake.

I've taken an IR35 contract review, passed, so I'm safe, right? No!

So, you’ve had your contract assessed for its IR35 status in the past. It passed. You’re safe, right? New rules don’t affect you until you go for your next contract, right?

Wrong! Your contract may have been outside IR35 before April 6th, 2017. But, since public sector paymasters adopted IR35 status responsibility, you may now fall inside.

IR35 TestOne problem is obvious. Public sector service providers’ workloads are already overstretched.

You don't have to take my word for it. Media channels have dedicated news streams highlighting their woes. Humping more work on top could be the straw that cripples the ill-fated dromedary.

The question is, how can those making the decision tell? Workload aside, do these paymasters even know how to define a limited company contractor?

Yes, some public sector outsourcing departments may have genuine concerns about your status. Others may not have time to assess contracts on an individual basis. But, what's the betting they all tar outsourced workers and consultants with the same brush?

How do I know what my current contract status is?

This contractor status fiasco doesn't just apply to new contracts. It could affect legacy contracts, too.

Did the April 6th changeover date harpoon your contract timeline? Don't know? It's in your best interest to find out.

Your client may have switched you onto payroll as their systems switched over. What's more, they were/are under no obligation to tell you.

Those decisions could have consequences beyond your current contracts. Should you invoke IR35, it could call your previous contracts into question, too.

Chris Bryce acknowledges the changes and challenges they’ll cause:

  • Should a third party’s whim so fundamentally affect the contractors it employs?
  • Is it right that contractors don't get a say in such potentially damaging changes?
  • No, it's not fair. But when did HMRC accept 'fair' as part of their policy-making process?

Contractors should speak to their clients and agencies. Ask them to clarify what their contract status is. Make sure you have in writing a contract that outlines how they plan to pay you moving forward.

How your agency can help you now:

IPSE acknowledges the predicament in which many contractors now find themselves. IR35 rules weigh hugely on the profitability of any contractor-client relationship.

Yet few, if any, contracts stipulate the consequences of changeover midway through a contract.

The truth is, all limited company contractors work under the shadow of an IR35 review. But that’s always been at the behest of HMRC and the IR35 team.

It's always been a case between the taxman and the contractor vis a vis their contract status. To date, it’s never included the client’s consideration of how a contractor works.

Now, the tables have turned. It's up to the agency to distinguish the relationship between contractor and client.

New contracts must stress that it’s a business-to-business arrangement. Any hint of an employee/employer relationship could spell disaster for the contractor.

Agencies must request this information from clients. Only by managing contracts thus can agencies ensure their status. In short, agencies must protect contractors, ensuring they don’t incur employee or IR35 penalties.

Bringing in the big guns

Is it too big a task to take on for agencies? Not only do the new rules seem to be outing a strain on service providers, but also now the middle man.

To this end, Chris Bryce is reaching out to other influential organisations. He's targeting two organisations that can affect the whole contractor-public sector service provider chain.

REC, the recruitment and employment confederation, are one such organisation. APSCo, the association of professional staffing companies is the other.

Together, leveraging their influence in Westminster, these organisations can fight contractors’ corner.

Any decisions about IR35 regulations in the public sector won’t happen overnight. We all recognise that.

The change that's happened is so fundamental, it will affect the entire supply chain. As will those to address contracts' status and public sector paymasters in the future. Until such a time that we see clarification;

“contractors should approach their agencies to have their contracts renegotiated.”

Yes, agencies may grumble at going another extra mile. But professional recruiters have to strike a balance. They need maintain a pool of trusted and trusting professionals to fulfil contracts. They'll also need to keep clients who depend on agencies for outsourced skills happy.

From manual to AI assessment – it’s a m-ESS

The complexity of assessing a contractor's IR35 status has not gone unnoticed.

What hope, then, of a machine's ability to understand limited company pay structures' nuances? Moreover, the status of public sector contractors who were their directors?

Relevant parties had prior access to the ESS tool that will conduct these tests. Initial results confirmed what many feared: it wasn't up to scratch.

Chris Bryce, in the run up to the launch, feared that the tool was inoperable. This was within as little as two months before its launch.

He was right. The algorithms’ suitability didn't perform well in the prototype’s dress rehearsal.

The truth is this: there's no clear definition of an IR35 compliant contract.

For every assessment, different elements of an appraisal carry more or less weight.

Those weights often take their cue from case law. The outcome of an investigation can depend on many elements. These elements are implicit, rather than black and white, such as the natures of:

  • the client (including any relationships with the contractor);
  • the awarding party (e.g. agency);
  • the work itself and where it's carried out;
  • the contractor expediting the contract;
  • the method the client or agency pays the contractor.

Should we expect an algorithm to weight those elements with equal sensitivity (or lack thereof)? It’s a sticking point playing on the minds of those stakeholders.

Right back where we started from

Longstanding contractors could become sitting ducks if their clients switch them to on-payroll. The prospect of retrospective action by HMRC is real. It will also, no doubt, force many contractors to look at other types of payment structure.

IPSE has asked for an amnesty from the taxman. It wants HMRC to move forward with impunity, however unlikely.

It’s not only their current public sector contract that could undermine contractors' livelihoods.

IPSE cannot protect its members from any retrospective action HMRC may take. But contractors can and should safeguard their current position.

Bryce is asking contractors to approach their client or agency for a new contract. That's irrespective of when the awarding party awarded it.

The new contract itself should not be an extension or renewal of a previous contract. It should contain express information about the nature of the payment structure.

If a contractor cannot get this assurance, they should renegotiate their contract rate. That increase should reflect potential losses if a client decides they’re inside IR35.

IR35 and Contractor Mortgage Advice: What to do Next

Here at Freelance Financials, we've a few unanswered questions of our own. The new way public sector clients could pay contractors is a growing concern. Switching to PAYE could have a noticeable negative impact on a contractor’s mortgage affordability.

But there is a silver lining if you can negotiate a new contract. Doing so will give you one of two elements contractor-friendly mortgage lenders desire most:

  1. if your new contract ensures a B2B relationship, you have great contract-in-hand cover
  2. if you renegotiate your rate, the increase in income will make repayments more affordable

For IR35 help, you can contact Contractor Weekly to get an up to date status of ESS and automatic payroll. They can organise an IR35 test for you.

If it's an IR35 calculator you're looking for, QDOS has a great one. If you want "intermediaries legislation" explained, watch their great video entitled "What is IR35"?

If you think that a switch to on-payroll will affect your mortgage affordability, talk to us.

We can help you visualise what you can afford for a mortgage as an employee on PAYE. If your public sector client has switched you over, ask them for the details. You need to know about your payment structure at least as much as a lender does.

Other downsides of switching to on-payroll

A new contract may also show a short time working for your current client. Or if you get a new rate but for the same contract, you may have little contract in hand cover.

Either way, High Street lenders will struggle to offer you a competitive mortgage. Given the changes, in their eyes you'll seem too high a risk at face value.

The first thing you must do is confirm how your public sector client foresees paying you. We can then advise on the likelihood of you getting a mortgage as a new contractor/homebuyer.

If your concern is over your current mortgage, call us at once. There are ways we can help.

We can see if remortgaging onto a lower rate or type of mortgage is an option. Thinking out loud, an offset mortgage might be a great option if you've set aside decent savings.

Whatever your public sector client or HMRC decides, don't panic. ESS, IR35 and PAYE payroll needn't be the end of your homeownership dreams. There’s both insurance and a contractor mortgage out there for you, on-payroll or not.

Author: John Yerou

John Yerou is a pioneer of contractor mortgages and owner and founder of Freelancer Financials, Contractor Mortgages®, C&F Mortgages and Self Employed Mortgages, trading styles and brands of the award-winning Mortgage Quest Ltd.

Posted by John Yerou

on August 7th, 2017 14:18pm in Financial Advice Blog.