As IR35 reforms in the public sector look set to go ahead in April 2017 agencies risk losing business if they only engage contractors who use a PAYE umbrella firm rather than engage with limited company contractors directly.
This warning comes from Dave Chaplin, CEO of ContractorCalculator, an online portal that provides free advice and information to contractors and freelancers, who sees agencies taking the risk averse route when sourcing contractors for public sector roles.
The new proposals include debt transfer provisions being imposed on the party responsible for determining the contractor’s IR35 status, which, in the majority of cases, will be the agency. This will mean the agency will be at risk if they fail to deduct tax where they should.
The danger is that agencies will adopt a risk-averse approach and avoid engaging with limited company contractors. It will mean that agencies, the public sector and limited company contractors miss out.
Dave Chaplin argued:
“Whilst insisting on umbrella only models for contractors agencies will eliminate their financial risk, but this won’t work for high demand skills like IT and engineering.
“Agencies could learn the lessons from 16 years ago when IR35 came in – only those agencies that worked with the contractors to keep them outside IR35 were able to attract and retain talent.
“In a recent survey conducted by ContractorCalculator 80% of contractors said they will refuse inside IR35 contracts or working via PAYE umbrella companies. This presents a huge risk to agencies with public sector contractors when the rules come into play in Aril 2017.
“It is an entirely unfair proposal. HMRC is using the tactic to encourage agencies to be risk-averse when it comes to engaging with limited company contractors and in effect are penalising the whole supply chain. Highly skilled and in demand contractors will vote with their feet and move to the private sector.”
ContractorCalculator believes that the reforms will lead to a rise in public sector costs as well as more administrative and burdensome processes for all parties concerned. Trying to force contractors into using umbrellas will also mean revisiting issues associated with the Agency Workers Regulations (AWR).
“Fear will undoubtedly drive agencies to try and only engage contractors who use umbrella firms but they will find it very hard to find the best talent for the roles.
“HMRC has maintained that the proposed reforms are only intended to be implemented in the public sector, but the widely held belief is that it could be rolled out in the private sector in time.
“This could have enormous implications for the whole supply chain and significantly reduce the flexible labour market as a whole. This will be hugely damaging for the economy which relies heavily on the skills and expertise of the UK’s 1.9m freelancers and contractors.”