Written by Sarah Hein, Mishcon de Reya LLP
With less than 2 months to go before the new rules are due to come into force for the private sector on 6 April, businesses that use contractors have a limited window of opportunity to prepare for the new compliance burden. Confusingly, the draft legislation remains subject to consultation, both in the House of Commons (although resolution is expected soon) and in the House of Lords (this is likely to run for longer). We do not expect to have certainty until 11 March when the Budget is due to confirm that the new rules will come in from 6 April.
From 6 April, end users of contractors will be obliged to determine whether each and every contractor it engages is either inside or outside IR35 (i.e. should they included on the payroll or not?). The person in the chain of contracts who is immediately above the contractor's personal service company ("PSC") (often the recruitment company) will be responsible for operating PAYE and accounting for income tax and national insurance contributions (NICs) to HMRC. HMRC estimates that more than 90% of contractors do not currently apply the tax rules correctly and expect to receive significant additional tax once these rules are up and running. This suggests there must be significant extra costs to the private sector. Employers' NICs, at 13.8% will be a significant extra cost for the supply chain, and cannot generally be passed on to contractors.
How are these being dealt with in practice?
You may have seen that 30 contractors from Thomson Reuters have recently come out to negotiate as a group in respect of their post-April 2020 working agreements. The contractors are unhappy that Thomson Reuters have not yet confirmed their status and that their net pay will fall if they are deemed to be inside IR35. They claim they will lose 45% of their gross pay and demand a 35% pay rise each in order to be moved on to the payroll.
The Financial Times reports that Deutsche Bank is likely to lose 50 out of 52 workers in their London based "change management" team who specialise in efforts to prevent global financial crime. It remains to be seen whether these projects will be able to complete as originally planned and budgeted or will take place at all. Deutsche is one of the many banks that has decided not to work with contractors post-April and to either use workers on payroll or dispense with the services of contractors.
What does this mean for you?
All of this goes to show how important it is to keep your contractors in the loop and happy with the situation as it progresses, or else risk them walking off projects. The potential disruption of contractors leaving a project halfway through is significant and each affected end-user business will need to be mindful of their own contractor profile.
We encourage all end-user clients (other than small companies who are exempt from the new rules) to review the contractors they use currently and consider what the likely payroll implications of their current working practices will be post-April. Then they need to decide what approach they wish to take in relation to their contingent workforce and then engage as early and in as much detail as possible with their contractors in the hope that this can be amicably resolved before the April deadline.
We have helped a number of clients with reviewing their contingent workforce arrangements and can provide advice on this topic.
Mishcon de Reya have a leading UK Recruitment Services Group made up of recruitment specialists from their corporate, employment and litigation practices. A number of their legal specialists have advised on sector specific issues for over 20 years.
Their clients are both bricks and mortar and platform based, ranging from start-ups and SMEs to major international players.
They offer a full service of contentious and non-contentious legal advice, including regulatory and corporate and employment and commercial contracts, as well as international expansion, data protection, cyber and immigration. This is what sets them apart from their closest competitors