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The impact of finance sector IR35 decisions on contractors

Posted on 2nd July 2020 by Phil Ainley MCIM CMktr

IT Contractors IR35 finance sector

IR35 reform to the private sector was already having a negative impact on contractors working in the finance sector prior to the Covid-19 lockdown. Now it appears the economic impact of the lockdown is being used as another reason to impose rate cuts and compulsory employment on what is already a much-maligned sector.

Stories are beginning to appear online about contractors being forced to take significant reduction in their day rates from 10% to as much as 25% in some cases. Faced with the only other option of being offloaded by the institution, contractors are left with no other choice but to sign.

This activity is nothing new, with many financial institutions trying to impose on contractors that they work for recruitment outsourcing companies rather than working through their own limited companies ahead of the impending changes to IR35. In one instance the outsourcing company also imposed the same rate cut on its contractors.

However, if there is a genuine outsourced arrangement in place, then the contractor can still retain their PSC, but the ‘outsourcer’ becomes the end-client for IR35 purposes, which may not result in a rate cut.

When the changes to IR35 in the private sector were deferred in March 2020, some of the decisions were also deferred, but it will only last for a short period now that the economy is slowly beginning to get going again.


The ripple-effect

The concern for finance sector contractors is that once one establishment decides on a move such as this, the others soon follow suit causing a ripple-effect across the sector.

However, in these unprecedented times contractors may need to accept the situation (at least in the short-term) to ensure they can continue to earn a living. The finance sector cannot simply offload all of its contractors and expect to continue running smoothly, and those working in IT will still be required by these institutions to ensure upgrades, programming and security (among others) are maintained to the highest levels.

Sadly, a reduction in roles and opportunities as well as streamlining across all sectors is an inevitability of the impact of the Covid-19 lockdown as companies “restructure for a brighter future” to cut costs. Contractors should prepare themselves for more activity of this kind over the next couple of years.

This may be a short-term issue as ultimately financial institutions still need flexible resources. It will be no surprise if an end-client broke ranks and started engaging contractors via their PSCs to ensure that they retain the best talent.


Private sector IR35

April 6th, 2021 will soon come around. End-clients and recruitment agencies whether in their role decision-makers and/or as fee-payers who didn’t prepare themselves for the original date of April 2020, now have a second chance to get their houses in order but need to engage with these changes now, as April 2021 will soon be upon us.

Private sector companies will need to prepare unless they are classed as a small company.

A small company must not meet two of the following criteria:

  • Net turnover exceeding £10.2m
  • Balance sheet totalling more than £5.1m
  • More than 50 employees


How Caunce O’Hara and Markel Tax can help

For end-clients

Making the IR35 decision will require a good understanding of tax status, which is largely based upon case law and its interpretation.  In practical terms this means having contracts with direct contractor engagements as well as with agencies if used, which reflect the IR35 status of the engagement.

It also means assessing the working practices of each engagement so that they support the contractual terms and vice versa to arrive at the IR35 status decision.

End-clients must then deliver that decision by issuing a Status Determination Statement which gives the reasoning behind the decision and this must be delivered to the correct parties in the labour supply chain.

If the SDS is challenged by a contractor (or an agency), there is a requirement to respond to that challenge as well.

Unfortunately, HMRC has not offered any real guidance for any of this and so many end clients are looking for help, which is where Markel Tax’s employer Solutions team can help. 20 years of dealing with IR35 from writing and reviewing contracts to success at Tribunal puts us in a strong position to work with end clients to ensure that they have a robust process.


For fee-payers

Fee protection insurance protects businesses and their advisers against the increasing number of HMRC enquiries. HMRC investigations can be a headache, especially for those who are inexperienced in IR35.

Allied to this is the concern that if HMRC can successfully argue that an engagement is ‘inside IR35’, it is the fee payer that has the liability.

This means that an end client can be both IR35 decision-maker and fee-payer, but for an agency which is responsible for paying the contractor’s PSC, it means the buck stops with your business, not the end client’s.

Markel Tax already provides tailored and appropriate fee protection solutions designed to limit the damage and stress of having to deal with an HMRC enquiry.

The policy will settle the professional fees incurred. However, Markel will also be offering a tax losses insurance designed to pay the tax, interest and penalties which might result from an HMRC enquiry – in the same way that contractors can insure current engagements.


For contractors

Until 2021, contractors are still responsible for determining their own IR35 status – and for contractors engaged by small businesses the position will not change then either.

But how to do that?

A contract review is the way to verify your IR35 status via a comprehensive report which will provide you with an “outside” or a “inside” decision.

Where the opinion is “outside”, it provides you with an independent assessment to take to your end clients to evidence why they should treat your engagement as ‘not caught’ by IR35 after next April; but where the decision is “inside” it gives you the opportunity to make any necessary changes with your client to ensure you are not working inside IR35, now or in the future

The contract review is available with Caunce O’Hara’s tax enquiry and legal expenses insurance policy, which will provide cover for legal representation for most instances in which a legal cost is incurred.

As indicated above, contractors can also insure against the tax loss to meet the net tax loss arising when HMRC successfully argue that an insured’s qualifying contract falls within the scope of IR35. The contract review must determine the contract/engagement as being outside IR35 to purchase Tax Losses Insurance.

Please be aware that you must also take out the tax enquiry cover to pay for the defence of an HMRC IR35 investigation. The tax enquiry cover needs to be in place for the notification period in which an insured contractor is entitled to make a claim.

You must continue to renew even when not undertaking any contracts otherwise they will invalidate the tax losses insurance policy.


Further help to ease the challenges contractors face

As if IR35 wasn’t enough to deal with, contractors face a multitude of challenges every day. As limited company owners working through their own PSC, contractors are exposed to the many different risks of the business world.

At Caunce O’Hara we have been protecting contractors through insurance since 1995. Whatever your profession, we can provide you with the indemnity insurance and commercial liabilities cover you need to stay protected and thrive in your business activities.


If you are a contractor who is concerned about IR35, please contact us today on 0333 321 1403 to arrange an appointment to speak with an IR35 expert.

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