Engaging with IR35 helps to attract and retain contractors

Concerned that this would leave them exposed to an HMRC enquiry on past contracts, many PSCs decided to participate in the newly required, client-led disagreement process to challenge and overturn end client decisions. From our experience this did not result in many end clients changing their minds as effectively they were marking their own homework. The PSCs were then between a rock and a hard place and facing the choice to “either accept our decision or leave.”

Then, at the last moment the government decided to postpone the legislation for 12 months because of the Covid-19 pandemic. This created what can only be described as the IR35 ‘hokey cokey’, with PSCs moving from being outside IR35, to then being inside, then back to outside and inevitably back inside, when the legislation was finally introduced on 6 April 2021.

This merry dance also created an administrative nightmare for recruitment agencies, which had to amend and re-issue contracts to their PSCs. The upshot was that tens of thousands of contractors found their take-home pay dramatically reduced by having to go onto PAYE. This was a move justified for some, however there was an awful lot of collateral damage, meaning contractors that were clearly outside of IR35 were now inside as end clients were not prepared to change their stance.

Risk v fairness

The call from PSCs for fairness from end clients when undertaking IR35 assessments has been demanded for a long time. On the one hand, end clients refused to engage with the legislation properly, mainly because of the additional administrative burden, associated costs and the risk of falling foul of HMRC.

Then, on the other hand PSCs looked to maximise their companies’ incomes and their ability to seek out more lucrative and interesting engagements. That sometimes requires significant travel or staying away from home, which historically they would have applied for, but due to the removal of travel and subsistence expenses for inside IR35 contracts, such engagements were no longer a viable option. This placed recruitment agencies very much in the middle, trying to keep both their clients and contractors happy.

"Tens of thousands of contractors found their take-home pay dramatically reduced by having to go onto PAYE"

However, as we predicted, there are signs of hope as we are starting to see an increase in the number of end clients softening their approach to off-payroll working, especially in the private sector, by moving away from the early hard-nosed position of “all PSCs are inside IR35” or “we no longer engage with PSCs” to offering more assignments that are deemed to be outside of the legislation.

This could be for several reasons, including end clients being more comfortable in understanding and dealing with the off-payroll legislation and also realising that to attract the best contractor talent for inside IR35 roles many were having to pay more to compensate the PSC for the additional tax burden of being inside IR35.

To continue this momentum, recruitment agencies will play an important role and should continue to educate and support their end clients to accelerate this change of attitude and to get across that where they engage with the legislation properly and fairly, and implement robust processes, the risks are relatively small.

Attracting the best contractors and end clients

The general consensus is that the need from end clients for skilled contractors for short-term assignments and projects will continue to increase, especially as we look to galvanise and grow the economy following the pandemic and other world events that have had a negative effect.

This is good news for contractors, who will be seeking out the best contract opportunities, ideally on an outside IR35 basis. Those recruitment agencies that have a reputation for being knowledgeable on all things off-payroll and have a strong portfolio of end clients who deal with the legislation fairly, will be the recruitment agencies that contractors will mainly want to do business with.

"The general consensus is that the need from end clients for skilled contractors for short-term assignments and projects will continue to increase"

It then follows that a recruitment agency that has access to the best contractor talent will have the advantage when it comes to winning new business and partnering with end clients looking to tap into that talent pool to receive the best level and quality of service.

So, for now, it’s far from perfect but outside IR35 engagements are on the rise. This will likely improve further with the expected off-set provision looking to be introduced in April 2024. This will mean that in the worst-case scenario, any tax and NIC liabilities assessed as due by HMRC, where successfully overturing an end-clients outside IR35 decision, will be significantly reduced by taking into account what tax and NIC has already been paid by the PSC. This is another reason for end clients and recruitment agencies to rethink their off-payroll strategies for engaging with PSCs on outside IR35 contracts.