UKTECH | IR35 Misinformation from Agents.

Ian Durrant writes Recently I have been coming across much misinformation with regards to the IR35 tax changes. Some of this is from uninformed Contractors who do not yet have a full grasp of all the implications of the changes. Even more worrying than this however is some of the misinformation being propagated by Agencies, either through an accidental or deliberate misunderstanding of the issues involved.

Under the IR35 legislation it is the Contractor's Ltd company that is responsible for the payment of the contractor's taxes and National Insurance. The legislation specifically places this burden upon the contractor's company. However, recently I have been passed comments and documents made by some agencies that are, to be polite, a little less than accurate in the information conveyed. In particular, one agency has been handing out documents to contractors at IR35 presentations that make the following claim:-

Two principal routes to take if you want to stay in the UK.

Use a new form of contract to alter your personal status to Schedule "D" – Go self-employed.

Schedule "D" Self Employment.

To be able to retain some of the tax and NIC breaks people are being advised to become "Self Employed" (Schedule D). This is a change from their current schedule E tax status where contractors are employees of their own personal service companies.

I have not heard of anyone advising this. What is being advised is that the contractor needs to change his working practices and contracts so that he can pass the "self-employment" tests. This does not involve the contractor converting to schedule D taxation.

In itself this statement is most probably inaccurate, but takes on a different hue when you read later in the document:-

UK Clients

Protected from tax exposure when using an Agency. Clients could however expose themselves to a significant financial risk if they engage "self-employed" contractors or contractors who wish to work to a new contract format that exempts them from IR35.

The document further goes on to explain that the client will become legally liable for operating PAYE if the contractor is later found to fail the tests.

This is simply untrue. Under IR35, it is solely the contractor's responsibility to ensure that correct payments are made under the rules. This particular agency appears to be twisting the truth by confusing Ltd companies demonstrating a "self-employed" relationship and the Schedule "D" self-employed contractor.

There are undoubted attempts to frighten clients into retaining the status quo (thus forcing a rise in rates and therefore agency profit margins) whilst scaring them away from employing contractors on a "direct" basis. More profit for no extra effort.

Then there is the letter I have recently seen from Peter Searle, MD of Computer People. I have included the full text of the letter at the bottom of this article but I would like to draw your attention to one particular paragraph (emphasis is mine).

In addition to IR35 there are some changes in the employment law and it is essential that you are not exposed either to risks that are caused by the working time regulations and European law changes. Ultimately it could mean your direct contractors are effectively entitled to all the benefits currently offered to your permanent staff.

Yet again this is an attempt, to frighten clients into using agency-supplied contractors instead of the direct variety. It implies that the use of an agency protects the client from these risks. I would strongly dispute that. I can find no evidence to support the theory that, under IR35, the presence or absence of an agency makes any difference to the degree of risk for the client. The only sure way to mitigate the risk is to ensure that the contractor's working relationship is more "self-employed" than "employed" both in the contract terms and in the reality of the working relationship.

It is high time that agencies started selling their services based on the value they add to the relationship, rather than using Fear, Uncertainty and Doubt to manipulate the clients and contractors into the situation that suits the agencies best. They devalue themselves by doing anything less.

Ian Durrant

Natdata Ltd.

Director.

Text of letter from Peter Searle, MD of Computer People to client companies.

(name of client withheld)

Dear Sir/Madam

As members of ATSCo and the Recruitment and Employment Confederation (formerly FRES), Computer People is dedicated to representing the interests of our customers, both individuals and organisations. We aim to maintain the standards of excellence we are committed to, including acting in an advisory or consultative capacity with regards to issues that affect our industry.

One such issue is IR35 - the new tax regulations designed to tackle tax and NI avoidance by the use of personal service companies and similar intermediaries. As you may be aware the Inland Revenue has now published its final `employment status` guidelines in relation to these new regulations. The final "IR35" rules are due to be published later this year, with the regulations due to take effect at the start of the new tax year in April.

By introducing higher taxes and National Insurance contributions for IT contractors who use personal service companies, they are causing a reduction of between 7 and 20% in real income to the contractors, this will undoubtedly have some knock on effects. Some contractors will look to change their existing terms and conditions to reflect their status on site as a software provider, but the majority of contractors will be unable to do this and will be caught by the change in legislation.

There is a possibility that the contractor will try and pass on some of this increase to clients but this will depend on supply and demand for their skills. I would expect it to cause price increases in skills for E-commerce contractors and other highly sought after technical personnel.

In addition to IR35 there are some changes in the employment law and it is essential that you are not exposed either to risks that are caused by working time regulations and European law changes. Ultimately it could mean your direct contractors are effectively entitled to all the benefits currently offered to your permanent staff.

As part of our ongoing service to our clients, we would be happy to advise you of your current exposure and further explain any impact IR35 could have on your business as a user of contract staff.

We will continue to issue relevant information to you and if you have any queries, please contact your Computer People contract consultant who will help to provide guidance on your best options.

Peter Searle