#IR35 Why we like the concept.

Originally written by a contractor.

16/3 15:58

We like IR35 because HMRC is right about one thing. There are thousands of ‘disguised’ employees described as contractors. Disguising employees as contractors benefits the end Client through huge cost savings, not least through reduced employer NIC payments. They have none of the usual employee concerns (pensions, holiday, health, benefits, cars etc) such as a duty of care and side-step the usual demands of employees. These Disguised Employees can be fired at a moment’s notice despite often long tenures, as many as ten years or more in some cases, with no regard to redundancy legislation or compensation of any kind.

What we like is that these ‘Disguised Employees’ will be rooted out and forced to make the choice to be a true contractor or an employee with no middle road. More importantly the Client will be forced to understand the difference between a true employee, disguised or not, and a true contractor in business on their own account. This differentiation we like because it forces the agencies and the clients to treat Contractors (a term like “PSC” that is not defined in law despite what HMRC would imply) with the respect due as independent service providing businesses. To agree appropriate contracts to support the necessary formal relationships.

No longer will we endure the poorly written, often unenforceable contracts of agencies (hastily re-written temp employee contracts in many or even most cases). Nor the ludicrous clauses at the client’s insistence that attempt to exercise employee style control over the Contractor; rather than understanding and accepting that they are receiving a deliverables-based service, not an un-glorified employee. Nor will contractors be subjected to concealed contract gaps where the agency does not have a back to back agreement with the end client, as required to honour their contract with the Contractor.

This is often exampled by the substitution clause, where the end client has not in fact agreed to it and the agency cannot honour the agreement with the contractor. If you are a Contractor and don’t know what this is then you should go and find out. Pronto.

We like IR35 because it is an enabler for the true contractor to operate as an independent business service provider, along with all associated risks, which is as it should be. This is soon to be legislated in an open and agreed structure that will be understood by all parties in the contract chain and force all parties to recognise contractors for what they are, i.e. OPW (Off Payroll Working) https://www.gov.uk/guidance/understanding-off-payroll-working-ir35

IR35 is a botch job because it tries to capture everyone.

As it stands the current approach to implementing IR35 is rushed and ill considered. IR35 is ill-defined. It penalises the hardworking genuine true business operator. It is decimating their target market, at least in the short term, causing reduced revenue, increased stress and a calamitous lack of control to be foisted onto the contractor by risk averse and unknowledgeable clients that do not understand the business model they should follow or indeed that there is one at all.

This is due in no small part to a total lack of support from HMRC and no appetite for the ambiguous risk (considered to be high-impact and high probability) created by the skewed unmanageable legislation coming into force. Worse, if HMRC did offer advice we strongly suspect that would also be flawed because all HMRC wants it seems is to force all contractors, true or otherwise, to become employees to increase tax revenues. One suspects this is because they do not understand the differences either (as illustrated by court cases lost); hence the ambiguous legislation. The sad fact is they are advising 2000 top companies; and guess what they will advise -: all contractors are employees…oh, and you must evaluate each one! A core conflict of interest.

Very few clients, and as many agents, really understand the difference between a true contractor and an employee. In fact, sadly, a large proportion of contractors don’t understand either. To make matters worse, HMRC, and its organisation of full-time employees does not get it either. In fact, as we mentioned above HMRC seem to think that all ‘contractors’ are the same , namely, disguised employees.

So as it stands there is often little to no understanding of the difference between:

• An employee

• A disguised employee

• A true contractor business providing a service

This is a result of a feeble, not fit for purpose, definition of what a real contractor is. A great opportunity to clean up the industry is being squandered in the interests of short-term unfair tax gains by HMRC. The result of this will be a much reduced capability for large corporations to change and evolve due to their irrational fear of liability for contractor taxes. The resulting lack of specialised services provided by thousands of contractors that will be subsumed into employee structures, once again taking the easy route for cost savings.

On the face of it, this bodes well for the big consultancies lining up to take up the slack, however this ‘obvious’ backfill obscures the specialist ‘hit the ground running’ knowledge pool that will be lost.

Riding into alternative structures, such as ‘Fixed Term Contracts’, which are mostly employee style contracts. These are easy to terminate at minimal cost, but this time clearly and openly inside IR35 so taxed like an employee AND still carrying the risks of being on a contract. This equals lose: lose for the contractor. These contracts don’t make financial sense and will only serve to cover some contractors’ fears of losing revenue (where a regular inflow is necessary) in the short term.

The Benefits of IR35

Currently, there are many thousands of ‘employees’ on long-term contracts — essentially contract employees. It is absolutely correct these cases should be cleaned up and should become employees.

There are many TRUE Contractors, moving between companies providing a unique and valued deliverables oriented service. The skills required to provide this service are honed and leveraged only by the fact that they are not a part of the organisation to which they provide a service. This difference is apparent in a true contractor. It’s embedded in the way they think and operate, and they are easy to spot by those who really understand contracting. A willingness to take on risk and an eagerness to partner the client, not serve, are clearly evident in this smaller community of risk-taking entrepreneurs. The understanding of risk is key in this relationship and yet clients seem to have a deplorable appreciation of this element. Add to this that agents have been refusing to offer assignments if there is anyone else involved in the business, and then claiming it is a one-man-business or a “PSC”.

Sadly, given the poor definition of the issues and inept IR35 design, these valuable resources for UK Plc are already being unfairly impacted by the changes coming into law in April 2021. Just as we saw in the public sector, which still suffers many projects struggling from the lack of available skills, there will be a slowdown in the dynamics of change in UK industry, right when we need it most post Brexit.

In the short term, the problem is exacerbated by organisations taking advantage of this confused change to cull and cost save, (note the blanket contractor bans by major banks, who just happen to be in a downsizing cycle). Equally, organisations will take advantage of the fear and uncertainty in many (especially less experienced) contractors that don’t understand if they have much choice. Whatever the short term outcomes we do believe true contractors will endure. Like any business they will hunker down and focus on clients that understand the benefits of true contractors, who do their due diligence and act sensibly in their interests. If clients understand that true contractor’s welcome Outside IR35 compliant contracts it is only a small step further to comprehend that compliant contracts and working practices are also in the interests of the end client. Many contractors are able to illustrate this and, with support of leading industry specialists, can explain the benefits to the Client of using the correct structure and relationship. It truly is win:win.

Most clients don’t understand the benefits of a contractor carrying (fully insured) risk and that they really can cover costs of replacement substitutes. Who better to provide a highly qualified contractor replacement in time of need than one with a sophisticated network of highly skilled specialist service providers? We have had many colleagues hired and supported many agents in their searches, so why not for our client in a highly improbable case of our being unavailable, for a substitute. Despite this, Clients always worry about the risk of not getting a good substitute. Easy to forget that if they don’t like the substitute they can request another or terminate the contract = nothing to lose for the client. It’s no different from a big integrator or consultancy house, (who often take on contractors for this), and what does the client do if they don’t like the consultant provided by the Consultancy? They send them home: it’s EXACTLY the same; at least it should be. It’s a relationship of trust and expectations, to be managed by both parties as in any contracted supply of service.

A contractor and client should agree the service definition and agree a B2B contract. The contractors company will carry the risks, like any other service provider. It will provide services ‘as a service’, not on a revamped agency temp contract, not by naming the person required or by stating hours of work or other factors of control, but by a B2B contractual business relationship. A true contractor is responsible to deliver the outcomes as agreed in the contract and will arrive “skilled up” to deliver, to deliver as contracted and expecting to be paid on delivery.

True contractors

Are about as far from employees as you can get already and Agencies and Clients are as guilty as HMRC for not understanding how this should work. Of course the hardworking employees of all three by definition have zero experience of being self-employed themselves and see only a tax dodge.

Did you know contractors only work through agencies because Clients insist we do? We much prefer to go direct because the business goals are congruent and aligned whereas an agency has a different agenda, in the form of its margin.

Did you know many agencies contracts are not fit for purpose?…

And the agencies promise contractually things that the client will not honour? What happened to ethics?

It’s time Contractors were accepted as professional service providers

HMRC should stop blurring the lines, stop taking advantage of blurred lines and scaremongering and call it as it is. They should first learn and then explain how to do this and enable clients to use contractors legitimately without worry of falling foul of unclear legislation. Clients should stop saving money by calling employees contractors.

Agents should have to follow suit and start being honest with the true contractors, working with clear and honest contracts to enable them to do their job or even better the clients should contract directly having paid a finder’s fee where necessary.

This is simpler than most organisations appreciate and is a highly beneficial win: win when understood. The benefits of true contractors are obvious and the costs associated with losing this valuable modus operandus through short-sighted panic-driven risk averse strategies will be far larger than might at first be apparent.

The Effects of IR35 are beginning to Bite

So, contractors are removed. Some will accept Umbrella or Fixed Term contracts for a short while however this will soon become just another temping model and will not provide the highly skilled services clients are accustomed to having available for short-term change.

For example, many ‘Change Transformations’ (our area of expertise) will have to wind down to an employee-based delivery, bound by company politics and policies driven only by ‘in the box’ thinking and in-house skills. Despite the fact that a Transformation or Programme of Projects is defined as a ‘temporary organisation’ and lead roles with that organisation will provide clearly defined deliverables. As a service provider a contractor would use their approach and methods, already proven elsewhere, however in-house teams will use only in-house knowledge and capabilities. A true contractor will not provide these services as an employee style contractor. It’s just too hard and not worth the risk.

The only alternative will be to bring in the big consultancy houses. However, that model itself relies on the contractors to be hired to manage the consultancies to get the best out of them.

So, pace will slow with an inability to find the necessary expertise in many areas. Only time will tell and one can only hope that after the cull common sense will prevail to empower the real contracting market to prosper for the benefit of all parties.

Many clients, including our current client, have been advised (by who? They won’t tell us) “all roles are within IR35”. We are agreed as outside. This is patently not true and many similar roles have been proven as not so by court cases lost by HMRC. Nevertheless, corporate society is risk averse and given the ambiguity (and we believe misrepresentation of the new legislation . For who is advising our highly able client that we are like employees?) they will opt to remove contractors’ services from their key roles within temporary organisations despite their clear deliverables.

So to the end clients we say, smell the roses and don’t try to re-create a new false truth by another route. Instead, be open-minded, be true, plan to use true contractors on true service provider contracts, black and white transparency from end to end, and you will find it is easier, safer, less risky. Ultimately more productive and beneficial than any of the other options.

To HMRC, we say accept that contractors have a role and live a life of hard work and risk as independents. A key part of their job is to find a contract, which is a regular thing. To maintain a network, to build a reputation, to insure against risks, to pay one’s own pension, engage an accountant, advise clients and deliver quality outcomes. This is a small business, it’s all things a small business does: HMRC should accept that in a true contractors case this is the reality, and it has a very real reason for being.

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Sadly, the government jumped on the short-sighted HMRC bandwagon and supported scaremongering tactics to frighten corporates into believing many potentially outside IR35 roles are inside, or ambiguous enough not to take the risk.

Instead of focusing on what a true outside IR35 contract should be most are lost in risk avoidance stick them in an umbrella or get shut.

Contractors are also to blame too. Many have poor quality contracts and were or are working inside IR35 as a result. Contractors (the true variety) have a responsibility to manage themselves and their client contracts, whether through an intermediary or not. Many of our colleagues were like rabbits in the headlights and jumped into umbrellas with hardly a whimper. Quite frankly that’s where they belong.

Contractors are small businesses and have a responsibility to behave as such. In theory that’s all that is required if clients understand how the model should work, but HMRC doesn’t say how it should work. It just implies it might take you to court and charge you millions. So, the corporates run for risk-free cover, risking the business projects they cannot then carry through. That costs jobs and shareholder profits, as well as corporation tax lost to HMRC.

An intelligent way for HMRC to kill contracting whilst saying thEY are not responsible.

Outside IR35 contracts and working practices are easy enough, but it takes know-how that is sadly lacking and willingness from HR hiring, which is also in extremely low supply.

And then, once most were fired or into umbrellas, they postponed OPW (too late for most) and if that wasn’t the last straw COVID 19 came along and put the last nail in the coffin.

We are very lucky (or clever) survivors delivering a critical change to a large global now enlightened (by us) corporate, but once that is done this summer we don’t expect to find rich or any pickings in our decimated market.

Written by and with a “contractor”, hence the different style of prose.