From April 2021, large and medium firms in the private sector that hire contractors will be responsible for determining their IR35 status rather than the contractors themselves as the Off-Payroll legislation takes effect. Whilst many oil firms will continue to hire contractors off-payroll, we are seeing some taking a risk-averse approach and issuing blanket bans on hiring contractors who work through their own personal service companies, insisting instead that they all go PAYE, either directly or via agency payroll.
For thousands of contactors who are genuinely self-employed in the oil sector, and who also have considerable expenses to fund, ‘on-payroll’ options are much less attractive because of the significantly less take-home pay. Consequently, unless the hiring firm can increase daily rates offered, up to 40% more in some cases, on-payroll will always be considered a last resort for contractors. The knock-on effect for hiring firms is a reduction in the available talent pool, increased hiring costs and potential project delays if they cannot source the talent required from elsewhere.
However, companies that take a proactive approach to adopting a robust Off-Payroll compliance process will benefit from a continued engagement of the best calibre contractors, who will naturally seek engagements where they can secure fair tax treatment that reflects their “outside IR35” status.
Therefore, the more competitive approach for firms is to navigate the new Off-Payroll world without exposing themselves to an excessive administrative burden or financial risk.
Hirers should review their contracting workforce without delay and identify those contractors who require assessing under the Off-Payroll rules and who might pose an IR35 risk. Carry out an initial assessment of your contractors based on the information at hand – the contract and the working conditions. The result will be key in informing the next steps, and answering questions such as:
- What is the accumulative employment tax liability for ‘inside IR35’ contractors
- What status factors are imposing risk upon the company?
- What projects are at most risk from the Off-Payroll rules?
Some contractors may be more expendable than others, and so you’ll have to identify those who need to be retained at all costs and prioritise addressing these engagements.
Having sought answers to the important questions and identified IR35 risk factors, you’ll be ready to establish a plan for your workforce going forward. You might find that certain policy changes to contractor working practices are enough to mitigate IR35 risk effectively and allow a number of contractors to operate outside of IR35.
But remember, any changes made must be realistic, applied in practice and reflected in newly drafted contracts.
Where the arrangements are such that contractors are clearly ‘inside IR35’ status, further issues will need to be considered, namely:
- Which contractors will be difficult to retain on an ‘inside IR35’ basis?
- How much would it cost to retain key individuals?
The Off-Payroll rules were always going to be a cause of conflict, and many contractors will either disagree with a deemed ‘inside IR35’ assessment or will respond by seeking opportunities elsewhere.
Key individuals could still be retained if contract rates were to increase to counter the tax hit, which in turn would limit disruption to projects. Ultimately, a financial plan is required to weigh up the relative costs and prioritise expenditure to ensure the impact of Off-Payroll on projects is effectively mitigated. Many firms have opened their bargaining positions with the unrealistic aspiration that rates will not be increased, and will in fact be reduced, when contractors are pushed on to payroll – but the free market will have other ideas.
The impact on contractors working in the private sector cannot be underestimated along with the impact on those companies that rely upon the skills of these on-demand flexible workers. Those firms that embrace the assessment process will thrive, those that don’t will lose out. The alternative scenario of course is that some oil firms will turn to overseas workers and turn their backs on hiring UK contractors so the UK economy and the Treasury’s coffers will miss out altogether. That would be a no-win situation for everyone.
Dave Chaplin is CEO of IR35 compliance solution IR35 Shield and author of IR35 & Off-Payroll Explained