IR35 in the Private Sector Delayed: How should Accounting Firms Prepare

Written by

Parth Shah

Managing Partner

It looks like the contractors in the private sector can breathe easy (for a year). Chief Secretary to the Treasury, Steve Barclay, announced on 17 March that the implementation of IR35 in the private sector will now happen on 6 April 2021 due to the coronavirus pandemic.

During Budget 2018, the UK government mentioned it would reform the off-payroll working rules in the private sector from April 2020. Fast forward to last week: the impending reform wasn’t even mentioned in the Budget 2020 speech.

However, in the executive summary was confirmation that the government has reviewed the reform and is currently making many changes to ensure its smooth implementation on 6 April 2020 in the private sector. But not anymore.

IR35 presents a bleak outlook for the contractor market as it impacts those operating via Personal Services Companies (PSCs). New legislation shifts the compliance burden from the contractors onto recruitment agencies and hirers specifically (any medium to large businesses) in the private sector.

Lack of clarity around the off-payroll reforms has caused a ruckus in the market, impacting contractors, recruiters, and businesses. The one-year delay due to COVID-19 is good news. However, Barclay insists the delay doesn’t mean cancellation, just a deferral.

Reasons why contractors want to be outside of IR35

Contractors who believe they are genuinely self-employed seek the flexibility to work with multiple clients and not be tied to a single employer. Especially in the IT sector, remote working is on a rise where companies are setting up the infrastructure that allows people to work from anywhere.

Further, many self-employed contractors operate from their own limited companies and enjoy lower taxes by paying a combination of a tax-efficient salary and dividends. Tax relief is also available to them in case they shut down their limited companies.

However, all this gets hampered when a contractor is identified (rightly or wrongly) inside of IR35. With clients erring on the side of caution, block decisions about the working position of contractors are frequently being taken and this has a dramatic effect on them.

Without full assessment of the relationship between the contractor and the client, contractors are being informed that the working practices followed with the clients show them as a ‘disguised employee’ and not an ‘independent contractor.’

That means their take-home pay will be reduced if they are unable to negotiate an increased day rate to adjust the higher employment taxes to be paid in this arrangement.

How accounting firms can remotely help contractors hit by IR35 during the Coronavirus outbreak

Most independent contractors have an accountant. With the IR35 reforms, the prospective impact on accountants was enormous where some were anticipating losing 20-30 percent of clients who are no longer contracting but moving to employment or umbrella companies, i.e., operating within the scope of IR35. Further, the ongoing Covid-19 outbreak has made everyone adopt work from home.

That means that even though contractors have a year in hand to figure out their plan of action, the pandemic has made it impossible for them to physically meet their accountants. The pandemic is already having a huge impact on small businesses throughout the UK, and everyone is still coming to terms with what this will truly mean.

The section below advises accountants like you on how to uninterrupted assistance to contractors in times like these:

1. Determine the IR35 status of contractors

Even though the final say lies with recruiters and employers, many contractors in the private sector will look out for accountants who can assess their engagements and prepare for the next course of action.

Your accounting firm could set up a special team or appoint a few staff members to assist in this regard. The communication can happen on Skype, Zoom and on the phone. Important documentation and information can be shared on email.

2. Handle deemed payments

If a contractor is found inside of IR35, they will be required to make a deemed payment. This amount is paid at the end of a tax year, and is calculated after considering corporation taxes and account expenses. You can calculate the amount they need to pay.

3. Ensure they hold small business insurance

If you have contractor clients with their own limited companies and employees, they must have the necessary insurances in place. One of which is Employers Liability insurance that provides compensation claims made by employees.

Your accounting firm can make sure that your contractor clients are adequately insured. Information can be exchanged via email or any other communication tool.

4. Help them with paperwork

In the event of an HMRC enquiry, your contractors may be required to provide copies for their contracts along with their accounts for a specific timeline. As their accountant, you are most likely to be their first point of contact – especially concerning the accounts.

Moreover, contractors might have to approach their insurers for their insurance to kick in before contacting the HMRC. You may have to tie all the loose ends for your contractors. Dropbox, WeTransfer and Google Drive are secure tools for sharing sensitive paperwork.

THINGS TO DO IF YOUR ACCOUNTING FIRM LOSES A LOT OF CLIENTS IN ONE GO

Hmm..if that happens to you, then there are specific steps you can take to minimize the negative impact on your business and to get back on your feet faster:

1. Expand your staff without the headache - outsource!

If you are spending more time handling accounting-related tasks and less time engaging with your contractors, it is time to consider outsourcing.

When you partner with an accounting outsourcing firm, they bring a certain skill set to the table – help you boost your efficiency and improve your bottom line.

The trained staff at the outsourcing companies are familiar with the latest changes in accounting laws and regulations and can guide in offering IR35 compliance support.

2. Offer new services - diversify!

If you have been only focusing on a limited number of services such as bookkeeping or year-end accounts, expand your service offerings. Payroll and tax return preparation are also viable services that can fetch you a range of clients.

Further, you can also take a step further and provide advisory services such as budgeting and tax planning apart. Your clients may be wishing you offered this service.

Even if you don’t have in-house expertise, outsourcing can help you diversify quickly without increasing your overhead costs.

3. Overhaul your marketing efforts

This scenario calls for you to pull up your socks and promote yourself aggressively in the market to attract more clients. Therefore, review your business website and revamp your business cards, marketing brochures and flyers.

Be active on social media and kickstart your email Marketing. Get the word about your services out there, and ensure that you spend at least an hour on marketing yourself. If you don’t have the right support in-house, Stellaripe can offer you digital marketing assistance.

The best part is you don’t have to be on the field to meet new prospects. Ramp up your online marketing efforts, hold preliminary conversations with potential clients on Skype or Zoom, and use DocuSign for paperwork!

4. Review internal processes - save costs!

Just because you have always worked in a particular way, doesn’t mean it is the best or the right way to do it. A perfect time to review your processes is when the focus of your accounting firm shifts away from contractor client demands.

Using someone to independently assess your existing processes is frequently the best way to undertake this as they do not bring all the historical ‘baggage’ to the table and can review things more objectively.

Outsourced accountants are frequently well placed to undertake this as they will have a wide range of experience of numerous processes and awareness of what works best.

Conclusion

Even though the world has shut down due to the pandemic, it will come out of it. And when that happens, the gig economy will continue to thrive, and people across the country still wouldn’t want to be tied down to restrictive working environments.

Your accounting firm should protect itself in the wake of the inevitable roll-out of IR35 in the private sector, and outsource vital accounting services, marketing your business aggressively to boost leads and make time to offer the right guidance to the deeply-affected contractors.

Want to have a quick chat about leaving your back-office worries to Stellaripe? Please ring us on 020 3475 3537 or email us at contact@stellaripe.co.uk.

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