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Markel Tax

19 Nov 2019

Engagements post April 2020? Don't bank on it

The first entities out of the starting blocks have been the banks, and there has been a common theme: a reluctance to engage with contractors trading through their personal service companies (PSCs).

A number of banks have stated that they will no longer engage PSCs post April 2020 when the new legislation comes into effect.  Many contractors have been given one of three options:
  1. Take a permanent employee role within the bank (if their skills are desirable to the bank)
  2. Sign up to an umbrella company
  3. Leave the engagement
One bank has recently said that to their PSCs that they have the option to work through your PSC on a ‘caught by IR35’ engagement for up to 22 months, but then you must become an employee.  With the 5% notional deduction for expenses being removed for private sector engagements with medium and large sized companies, it is hard to see why a contractor would use their PSC for ‘caught’ engagements covering a whole tax year.
 
It is not overly surprising the banks have taken this view, we saw the same initial reaction from a number of Public sector organisations when the rules were introduced to the Public Sector in 2017 and similarly, in 2014, when S44 ITEPA (the agency legislation) was amended under the banner of “false self-employment” many businesses in the construction industry had the knee-jerk reaction to not engage with self-employed individuals.  Thankfully time has healed those wounds and the majority of business retracted their stance (or perhaps they realised they would have no workforce if they didn’t).    
 
Of recent note there is one bank which is offering cautious optimism to contractors by suggesting it will look at matters on an engagement-by-engagement basis. 
 
While this is what HMRC has stated it is expecting end clients to do, there seems to be no incentive for HMRC to take action. If the new legislation is expected to raise £3billion then a “no contractors allowed” approach will certainly add to that pot.
 
Indeed despite blanket decisions and similar actions ion the Public Sector two years ago HMRC claimed in its policy paper back in March that it “has not seen evidence to suggest widespread blanket decisions ... in the public sector” .  If HMRC has missed what contractors have evidenced in the public sector, it may do so in the private sector.
 
And elsewhere?
 
While the banking industry has certainly been more publicised as to its approach, it is certainly not alone.  There a number of end-client organisation who are taking a similar approach and simply not engaging in the process.
 
This may in large part be due to the increase of targeted HMRC campaigns such as the recent round of letters sent to a large number of contactors working for Glaxo Smith Kliene.  While the letters were not formal enquiry letters, the thinly veiled assumption that the engagement is “caught” coupled with the warning of penalties led many contractors worrying about their position and has undoubtedly caused unrest for GSK and other large end-client businesses.  
 
Our take is that only those businesses concerned about losing contractors are likely to engage with the legislation properly.  Whether that will result in decisions based on commercial need rather than a tax status, only time will tell.
 
Feedback from the oil and gas sector does suggest that the intention is to engage, but as the model is based on an industry prone to massive fluctuations in its economic fortune, and which is therefore seemingly almost entirely dependent upon contractors, it cannot afford to take a blasé approach to the prospective changes.
 
But why are banks seemingly not engaging?
 
The answer may lie in the numbers of contractors involved.  If you have several thousand contractors  being engaged and renewed every six months, how large will your HR department need to be? Every engagement must be supported by a Status Determination Statement (SDS) which must be evidence of a status decision itself based on taking reasonable care.
 
The SDS must be handed to the worker and the next entity down from the bank in the contractual chain, and the End-client must implement its own disagreement process.  Any challenges to the SDS must be given a reasoned response within 45 days - and this all has to take place before the earlier of the engagement commencing or the contract being signed
 
While imposing a blanket decision that all engagements are caught is arguably not taking the “reasonable care” necessary under the legislation, a blanket ban on engaging PSCs effectively takes them out the legislation before it comes in  (and there are no tax repercussions for making a commercial decision not to contract with PSCs).  Given the amount of administration needed to comply with the legislation is it any wonder they are trying to bypass it entirely? 
 
Is there any value in engaging with the legislation?
 
The short answer is yes.  If you want to retain your best contractors, then as an end client you need to engage with them or they will go elsewhere.  We saw many businesses (with the Public Sector legislation and s44) realise this too late after the damage had already been done.
 
There is a lot of work involved, but help is available and can effectively undertake the whole decision-making process for you, including the creation of the SDS and dealing with subsequent challenges.  For those end clients engaging contractors directly, we are in the process of finalising a policy to offer cover for defending an HMRC enquiry AND the potential Tax/NIC liability of an incorrect decision.
 
This legislation looks like it will create a burden for end clients, but it could also present an opportunity for end clients to attract and retain the best contractor resources.
 
If you would like any further information please contact our specialist team on 03450 660 035 or by email at IR35@markel.com.
 
Tagged IR35
Next article in series

19 Nov 2019

IR35 in the Private Sector: Protecting 'fee payers'

Whilst we wait for the election to unfold and then hopefully a government to be formed and then early in the new year a budget, forward thinking agencies who will be fee payers in this new regime and some end clients who engage directly, are worried about the implications of getting the decision wrong.