IR35 – Contractors Must Stop Blanket Banning of PSCs

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IR35, Contractors and the blanket banning of PSCs
IR35, Contractors and the blanket banning of PSCs

Blanket Banning of PSCs

To have a future, contractors absolutely must stop the blanket banning of PSCs. It’s the IR35 battle they absolutely must win. All efforts should be concentrated on this.

We are not going to stop the IR35 reforms being implemented in the private sector. The best that can be hoped for is a delay.

However, it may be possible to get the blanket banning of personal services companies stopped.

Contractor Questions on the Blanket Banning of PSCs

  1. How were the IR35 changes supposed to work?
  2. What should have happened with the IR35 changes?
  3. Why contractors must get the blanket banning of PSCs stopped?
  4. How are some companies testing all their contractor inside IR35?
  5. How did the Lime-IT case blow HMRC’s view of the Right of Substitution out the water?
  6. So, how can Contracting be saved?
  7. How easy is it to take contractors outside IR35?
  8. How can market forces reassert themselves without the blanket banning of PSCs?
  9. Would HMRC make examples of companies taking on personal services company contractors?
  10. Why it is absolutely crucial get the blanket banning of PSCs stopped.

How were the IR35 changes supposed to work

Blanket banning of PSCs wasn’t meant to happen.

What was supposed to happen was that companies would make a determination on each and every contractors as to whether they were inside IR35 or outside IR35.

This had to be done on an individual basis. There were to be no blanket assessments of contractors. They all had to be done separately.

What should have happened with the IR35 changes

There was never any mention of companies making all their contracts inside IR35 whether or not their contractors were inside or outside IR35.

This was not given as one of the options.

This came about by chance – and it goes well outside any sense of fairness that the Government, the Treasury and HMRC should have.

Why should an outside IR35 contractor pay the same tax as someone who is inside it? Why should someone who is in business on his or her own account be taxed like a disguised employee?

Yet that is what is happening.

Why contractors must get the blanket banning of PSCs stopped

If we can get blanket banning of personal services company contractors then here is what is likely to happen.

All contractors will be tested to see if they are inside IR35 or outside IR35.

According to figures for those tested using HMRC’s Check Employment Status for Tax IR35 test the results are as follows:-

  1. 54% are outside IR35
  2. 31% are inside IR35
  3. 15% are indeterminable

So you would think that at most big companies around half would be tested outside IR35. They would be able to continue to operate using their personal services companies.

How are some companies testing all their contractors inside IR35

However, we know that some companies are testing their contractors using the CEST test and lo and behold all of their contractors are testing inside IR35.

All this shows is that you can get any result you want from the CEST test.

One company which has tested all its contractors and found them inside IR35 gave three reasons for doing so. One of them was that none of them had ever used a substitute.

How did the Lime-IT case blow HMRC’s view of the Right of Substitution out the water

The Lime-IT case blew this out of the water. The judgement there was that the onus of proof was on HMRC. Just because someone hadn’t used a substitute doesn’t mean to say that they wouldn’t in the right circumstances.

In this case the judge ruled that HMRC would have had to prove that if the right circumstance came up that the contractor would not use a substitute. They couldn’t do that and lost the case.

Yet this judgement does not seem to have made its way into HMRC’s test tool CEST.

And this particular company are failing contractors on a false basis.

How can Contracting be saved

However, to a certain extent, it doesn’t really matter whether 54% of contractors are tested outside IR35 or 0% are tested outside IR35 in terms of the future for contractors.

The market steps in here. If there are companies who allow 54% of their contractors to continue using personal services companies and others who let 0% of their contractors use them, who is most likely to get the best contractors?

Those who are not taking on personal services company contractors will be offering, effectively, 20% to 30% less.

This cannot last. Eventually those companies will have to either increase the amount they pay for contractors or they will have to take on PSC contractors.

How easy is it to take contractors outside IR35

It’s fairly easy to get your contractors outside IR35. All a company has to do is change the contracts they have with the contractor or agency and change the working practices.

Here are two articles which will show companies and contractors how to do this. The first one is taken using verdicts in favour of contractors at the Special Commissioners Employment Panel.

18 Ways to Stay Outside IR35 Courtesy of the special Commissioners

The second one shows how companies can help contractors stay outside IR35.

How can market forces reassert themselves without the blanket banning of PSCs

Gradually, market pressures will mean that more and more companies and contractors will have contractors and working practices that will allow them to operate outside IR35.

Market forces will mean we can gradually drift back towards many contractors being able to use PSCs.

However, if too many companies use the blanket banning of PSCs then this cannot happen.

Why should companies worry about hiring contractors when all of their rivals are operating PSC bans too. Take the big banks. All the major UK banks are operating blanket bans on PSC contractors. There isn’t a major bank who will be able to undercut the other banks.

Contracting, as we know it, would be over.

Would HMRC make examples of companies taking on personal services company contractors

HMRC would be looking to make examples of companies which continued to use PSC contractors like they did with the NHS. The NHS followed their instructions and used the CEST test on all contractors. Some passed it and were able to use personal services companies. Others failed it and had to go PAYE.

HMRC had guaranteed the results of those using the CEST test. However, they had a proviso saying that this only applies as long as the data input was correct. They then fined the NHS £4.3m for the misuse of the CEST tool.

Who decides whether the tool is misused or not and whether the correct info is input?

It’s HMRC!

They are the accusers, the police, the judge and the jury.

They are also the Appeals judge as well.

And as we can see from those companies who tested all their contractors inside IR35 you can get any result you want from this CEST tool. Many of their contractors tested themselves and found themselves outside IR35.

Why is it absolutely crucial to get the blanket banning of PSCs stopped

Once all our top companies operate the blanket banning of PSCs it will take a hell of a job to get PSC contractors back in there.

So, those who represent contractors, or who lobby their MPs, should concentrate on getting the the blanket banning of PSCs stopped.

And they can leave the marketplace to do the rest.

Time is short!

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