Unfortunately for accountants, IR35 reforms, introduced in the private sector from April 2021, aren’t going anywhere!
IR35 presents several challenges for accounting firms. Those operating in the contractor market may find that these clients do not need to lean on them for advice anymore. There are also concerns that the Government’s CEST tool (providing intelligence on the engagement status of workers) may not accurately generate the correct status of individuals.
Accountants need to get on the front foot to address IR35 challenges as failure to do so could lead to them losing clients and facing potential liability for incorrectly classifying the status of clients and their workers.
IR35 risks for accountants
Contractor firms may lose clients
IR35 has increased the risk of contractor accounting firms losing clients. The new legislation requires the engager (i.e. the company receiving the services of a contractor) to be responsible for deciding if the rules apply and pay taxes if the assignment is deemed to be within the scope of IR35.
This means that companies providing work to contractors could be cautious of being caught out by IR35 and may apply blanket rules to no longer take on self-employed individuals and instead insist they sign up as employees. In these circumstances, contractor accounting firms may lose clients, and their associated fees, due to their services no longer being needed.
Challenges with CEST tool
The government’s Check Employment Status For Tax (CEST) tool is designed to help stakeholders decide whether engagements fall inside or outside the scope of IR35.
However, the tool has been criticised for not always providing the most appropriate output.
Heavy users of it have reported that it is often unable to come up with a conclusive answer, returning instead a “Unable to make a determination” result. Additionally, the tool is not overly practical. For example, it is not designed with automation features to generate multiple queries at once.
The ambiguity and limitations of the tool mean that there is the possibility of accountants giving the wrong advice to clients from assessing their contractors.
The complexity of IR35 and ambiguity of the CEST tool increases the chance of accountants exposing themselves to additional risk from classifying workers incorrectly.
Giving clients the wrong advice can result in significant expense due to them having to pay PAYE and NI liabilities from misclassified workers.
This could result in a breakdown of trust between accountants and their clients and, in a worst-case scenario, the ending of contractual relationships.
Solutions to accountants' IR35 challenges
Rather than relying on the CEST tool, accountants should engage with specialist third-party partners to conduct in-depth reviews which ask contractors a multitude of questions and provide significantly more granular detail.
Companies such as IR35 Shield provide these services using AI-driven tech, which analyses UK IR35 case law and flags potential risks for each output.
Additionally, accountants can support more comprehensive reviews by bringing in client hiring managers, before individuals are engaged, in order to help them understand the scope of IR35 and to consider this within their recruitment processes.
New service lines
Accounting firms should consider introducing new service lines to make up for potential lost revenues from losing contractor clients.
These can be used to cross-sell to existing clients as well as to attract new ones.
Adopting technology tools, such as Modulr’s Payments Dashboard enables firms to introduce payments as a service or to facilitate the rolling out payroll services.
The Payments Dashboard has a number of automation features, minimising manual work and the risk of human error from accountants. This increases the likelihood of associated new services being easy to incorporate, scalable and profitable.
Another benefit of introducing these new service lines is that it will further embed accountants within their clients' businesses.
Many contractors are using umbrella companies to overcome the restrictions of IR35. This ensures they are still taxed as employees so are fully compliant. However, umbrella companies still have some tax benefits, such as making savings by adopting the Flat Rate VAT scheme.
Accounting firms should make efforts to retain their contractor clients and minimise lost revenue by either providing their own umbrella services or partnering with a third-party specialist.
So, while IR35 presents challenges for accountants, it creates an opportunity for firms to introduce new revenue streams, become indispensable to their existing client base and introduce efficiencies through technology adoption.