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IR35 ‘off payroll’ working in the private sector: the implications for legal contractors and private practice firms

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by Michael Bailey | 1 April 2019

The IR35 ‘off payroll’ rules will be extended to the private sector from April 2020 onwards, directly impacting a large number of contractors, and organisations in the legal sector. A number of my colleagues have already encountered the challenges this creates when IR35 was first introduced into the public sector in April 2017. As a result of this experience, and our understanding of the new regulations we have been advising our clients and candidates on the challenges they could be facing.  

But what exactly does IR35 mean for the private sector, and what can contractors and clients do to prepare in advance? In this blog, Manager and legal recruitment specialist, Michael Bailey looks at what IR35 will mean for the legal private sector and what legal professionals need to know.

What does IR35 and ‘off payroll’ working mean?

The UK government describe IR35 as an “anti-tax-avoidance rule that impacts all contractors who do not meet HMRC’s definition of self-employment”. IR35 comes into play when a candidate provides services for an organisation, but rather than being employed and paid directly on a fixed term contract, the individual invoices the organisation through a limited company. In short, IR35 is designed to stop contractors from avoiding paying tax when they actually act as an employee. It now puts the onus on each employer to ensure their staff and contractors make tax contributions in-line with legislation at payment source. 

Where a contractor is deemed to be ‘inside’ IR35, the client must ensure the employees’ National Insurance and income tax are being paid. As it is the employer’s responsibility to do this, the onus is on them to get it right, and hefty fines are likely to be handed out to those that do not comply or get it wrong.

Why is IR35 being introduced into the private sector?

The treasury believes that rolling out IR35 could recoup more than £1.3 billion per year by 2023-24 in unpaid or underpaid taxes. It is worth pointing out, that businesses employing under 250 staff will not be impacted at this time, which could in turn cause discrepancies in the market and put a strain on the locum talent pool if not managed correctly. I believe that as the challenges of working for a larger legal firm inside IR35 become apparent, many legal locums will decide to work for smaller firms to avoid the costs or the costs for these locums will increase to cover the gap.

What impact will this have for legal locums in the private sector?

The biggest impact this will have on legal locums is the reduction of their take home pay. Legal locums working in businesses which employ over 250 members of staff will see a reduction in their take home pay as they will have to pay full tax and National Insurance or they will have to increase their hourly rate to counteract the increase in tax, which in turn will make candidates look less attractive.

Julia Kermode, Chief Executive, Freelancer & Contractor Services Association is worried that this could become a very real problem, and urges contractors to think carefully when looking at alternative ways to pay tax.

“We will undoubtedly see an exponential proliferation of tax avoidance schemes as an inevitable consequence, as we have seen in the public sector. With a reduction in income, large numbers of contractors working in the public sector have been enticed by non-compliant tax avoidance schemes that reduce their tax and NI contributions by disguising remuneration as ‘something else’ such as annuities, loans or even marketing vouchers.

“However, the reality is that the tax and NICs will still be due and HMRC will pursue the individual for this, and with interest. However tempting, contractors must resist such schemes. We will continue lobbying for all such schemes to be stamped out before any IR35 reforms in the private sector.”

We would advise all contractors to check their employment status for tax (CEST test) on the government website to determine if they will be inside out outside IR35.

What impact will this have for legal firms in the private sector?

Many large firms across the UK rely on short-term legal locums (or contractors) to fulfil key assignments in their teams. Legal firms will either have to change the way legal locums work or pay higher rates to secure the best talent. Legal locums working under supervision, direction and control (SDC) as decided by the CEST (Check employment status for tax) test will most likely be inside of IR35, if the client says when, how and what they work, it usually indicates more of an employee rather than a contractor. Some simple changes to how a contractor works might be all that is needed.

Although April 2020 will come around very quickly, there is still time. There is still a chance with the current climate that the new rules will change or even be delayed.

Samantha Hurley, Operations Director at the Association of Professional Staffing Companies (APSCo) said “there is no doubt that the timeframe is still tight, and we would have hoped to see draft legislation before next summer. However, organisations will at least have a clearer idea from the upcoming consultation on the detail of the changes to enable them to upskill their workforces to be able to make appropriate status determinations and to get their internal processes and IT systems in order, to cope with the new rules.

“HMRC’s budget brief suggests the off-payroll rules will be extended in their current form into the private sector. APSCo has expressed real concern that the current public sector rules would not work properly in the private sector, particularly given fears over the accuracy of the CEST tool, and the lack of liability given to the end client”

Unsurprisingly, with the responsibility of IR35 falling on the employer, IR35 could in turn create more work for private sector firms employing contractors that fall within the scope of IR35. It may also have an impact on the talent available to larger firms, with contractors choosing to apply for roles with smaller businesses to avoid IR35 altogether, something that businesses should be aware of now.

The rules are likely to increase competition between larger and smaller firms that are both competing for the same talent, and I expect many contractors will choose to avoid dealing with IR35 legislation where they can unless larger firms can offset any reduction in take-home pay with higher initial rates of pay.

How legal contractors and firms can prepare for the private sector IR35 reform

Although the finer details have not yet been confirmed, and during consultation there may be changes or even delays I would advise legal locums to start thinking about how IR35 may impact them. There are a number of things that locums can do:

  • Go online and take the HMRC test – to find out if you are ‘inside’ or ‘outside’ IR35 in your current role, or the types of roles you typically work in. You should first take the HMRC IR35 test, which will assess your current work practices.
  • Think about the way you currently work – audit your current working practices based on the results of the HMRC test. Think about how IR35 changes could affect how you do business – and what you can do to help solve potential problems.
  • Speak to an IR35 exert or your recruitment consultant  – before making any changes to how you conduct business, get advice from IR35 and recruitment experts to make sure any changes you make are still compliant with IR35 and other laws and regulations.

Are you likely to be ‘inside’ IR35 and worried about its implications? At Sellick Partnership we have a wealth of experience dealing with legal locums and have had a lot of experience dealing with IR35 within the public sector. Get in touch with myself, or a member of our legal recruitment team and we will be more than happy to help.

Alternatively, you can check out this advice for legal contractors or view our latest legal jobs here