IR35 reforms: threat or opportunity?
3 March 2020: Reforms to the off-payroll working (IR35) rules are due to extend to the private and third sectors from 6 April 2020. As small accountancy firms serving personal service company clients become increasingly aware of the potential threat to their client base, how can they can adapt and flourish?
Since the IR35 changes were announced, private sector contractors and their large and medium-sized clients have been grappling with the likely implications. But the new approach also raises significant challenges for accounting firms focused on advising personal service company (PSC) clients.
The initial outlook seemed bleak, with some commentators even predicting the demise of the small practitioner specialising in PSC clients. Much of the uncertainty stems from a fear that many private organisations will take a risk-averse approach to determining whether contractors fall within IR35, and place them inside the rules. Alternatively, they may simply decide not to take on any contractors working through PSCs.
“There is no doubt that the landscape will change as more people get put onto payroll and won’t be using a PSC any longer,” says Anita Monteith, ICAEW’s tax technical lead and senior policy adviser. “But, although the work of small practitioners may change, opportunities will still be there.”
Some practitioners who have been following the earlier public sector response to the reforms will already have been preparing for the upcoming extension to the private sector. This might be through diversifying into providing different services, or being careful only to bring in new clients whose status is clearly outside IR35.
The reforms do not change the underlying rules for determining whether a worker is employed or self-employed. And HMRC has been quick to point out that the changes do not prevent people from working through PSCs, nor do they affect those clearly in business on their own account who would be genuinely self-employed.
“Those practitioners who always had a portfolio of clients will still be doing tax returns,” says Monteith. “Where a client is just being treated as having serial payroll contracts – one after another – then they may still need help to reconcile their tax at the end of the year.”
There will also still be organisations continuing to use PSC contractors determined as outside the rules. “And some people are going to want to challenge their status, so that will still give rise to a requirement for professional help,” adds Monteith.
The flipside of the widespread trepidation and lack of understanding about the changes could also attract new business. All the uncertainty means there is greater opportunity for firms to use their expertise to inform PSC clients, and help them navigate and adapt to the changes.
Under the umbrella
Contractor specialists are particularly well-placed to advise on new models, structures and ways of operating. One such structure is the “umbrella” company, which acts like an employer for contractors and organises payments after deducting tax and National Insurance Contributions.
“Some accountants may consider either setting up umbrellas of their own, or linking up with someone else that has an umbrella or series of umbrellas,” suggests Monteith. “If you do that, you can enable your clients to be paid through a payroll, but it may not be appropriate.”
Some large organisations may decide they will not be paying contractors through a PSC anymore. They may insist they be paid through payroll, but not want to take on the burden of it being through their own payroll. The umbrella company offers a solution to this. So some PSC clients may choose to move to these types of operating models.
Looking more broadly, it is clear that the wider world of work will continue changing. This, together with the seemingly unstoppable rise of the gig economy, suggests that flexible, responsive and fluid working relationships are here to stay. At the end of last year, for example, the number of self-employed workers in the UK hit the five million mark.
Such a backdrop presents opportunities for practices with specialist contractor experience to step in and provide advice about the most effective way to deal with tax requirements for all kinds of non-traditional working. “Any practice that has specialised in this area and really understands the landscape behind all of this will want to offer a range of added value services,” suggests Monteith.
Also in the mix are the making tax digital requirements. HMRC plans eventually to extend this to non-VAT registered businesses, and the self-employed, partnerships and landlords completing income tax returns. This could provide additional opportunities for contractor specialists to expand their services to micro businesses and sole traders who increasingly need workable digital solutions.
“Practices should already be looking at different ways of advising their contractor clients as well as innovative options for new and existing clients,” says Monteith. Tensions between current tax models and radical shifts in the wider world of work are not going away. “We will all be addressing these issues over the much longer term,” she suggests.