Accountants “losing clients” as contractors opt for PAYE to avoid IR35 pitfalls

IR35 rules about tax for contractors are being rolled out in April next year to the private sector, despite widespread criticism of lack of clarity and fairness.

And while many in the public sector, where stricter off payroll working has already become the norm, have already gone back into full employment, some accountants say their private sector clients are choosing to go PAYE ahead of the 2020 deadline. In some cases, this means they no longer require an accountant’s services.

Anthony Sherick of Contractor UK said it was hard to pinpoint the exact number of contractors who had opted for PAYE jobs as a result of IR35. However, the recent decision by banks, including Lloyds, to stop hiring contractors who operate under limited companies was an indicator of what may be to come.

“Unfortunately, some of the banks are making blanket assessments for IR35 based on current contract renewals in advance of April 2020,” he said.

Some companies would struggle to source niche skills as a result of the off-payroll working rules, he added, and the effect on the UK economy is predicted to be corrosive.

“There are amazing opportunities in technology for the UK economy – but this ‘attack’ on flexible working, alongside ongoing Brexit uncertainty, will do more harm than any monetary benefits to HMRC.

“Contractors will need to assess their opportunities and prioritise any outside IR35 roles, look for rate rises or working abroad contracts. Overall, this will reduce competitiveness in the UK economy,” Anthony said.

Why contractors move on

Ily Maisanda, CEO of Maisanda & Co Accountants in west London, said he lost some of his clients as they went full-time in sectors such as the NHS.

“Many of those that had their own companies were essentially NHS employees who did not want to be tied down, they needed some extra free time. Because if you have your own company, you can manage your life. If you are a full time employee, especially in the NHS, they will dictate to you when you should go for your holiday, among other things, and all for less pay,” he said.

Their decision to set up their own company and work as a contractor was in many cases based on other priorities and is not related to tax.

Ily said he has also noticed some private sector workers are choosing to work for companies abroad rather than be subject to rigid rules.

Especially in the IT sector, remote working is increasing as companies invest in infrastructure which allows people to work from anywhere, he said.

Those freedoms are a characteristic of many industries in the private sector, where flexible working practices have become increasingly common.

“It’s the rise of the gig economy, and people not wanting to feel tied down. And I don’t think the government is being sensitive to that,” he said.

Anthony Sherick added: “The Government, now more than ever, need to endorse and encourage the use of flexible working and developing niche skills in the economy.

“An immediate halt to the new rules in the private and public sector would be a great help.”

Diversifying to survive

Ily said he has advised some clients who are worried about falling foul of IR35 rules to diversify their client base. Although the rules can be confusing, HMRC is less likely to conclude someone is not a ‘true’ contractor if they have many different clients.

Some are still choosing to go with a full-time employer however, and that means they may no longer require an accountant to do their VAT returns. Coupled with the rise of software such as QuickBooks which will automate much of the process of filing tax, accountants themselves must diversify, he said.

The needs of clients who have to adapt to changes in legislation can be matched with the needs of accountants to offer different services.

“I encouraged a client of mine to go into manufacturing. And he now imports medical supplies, and sells to different institutions and organisations around the country. He has become less reliant on his IR35-deemed income,” Ily said.

The medical supplies business is growing in a way that a salaried role in the NHS cannot.

Adjusting to the changes wrought by IR35

It is an example of how branching out into business advice can open up new sources of revenue for accountants, as well as benefiting their clients.

To that end, Ily has set up Runagood software in his practice. It uses artificial intelligence to crunch the numbers and provide affordable business advice, showing a client where their business ranks on a series of measures, including productivity and repeat business. A Runagood Business Centre can handle 1,000 clients at once, making it affordable for even micro businesses.

It is one of the ways accountants are adjusting to the changes wrought by technology and regulation, including IR35.

Runagood CEO Duncan Collins said: “We are seeing a lot of urgent interest from practices that have lots of contractors asking to start immediately in order to have enough new clients by April when the HMRC hammer falls.”

Accountancy Age spoke with Blair Adams, a partner in the employment team at Law Firm Winkworth Sherwood, who has been dealing with several business clients who are looking to get in-line with IR35 legislation ahead of April 2020. Read the interview here.