On payroll could be the only option for contractors as in recent weeks several major banks have reportedly told contractors that they will only employ them as ‘on-payroll’ from next year as they prepare for the IR35 rules which will apply to the private sector from April 2020. While care is needed over taking a blanket approach, businesses are right to prepare now as failure to do so could see key staff walking away.

It seems the banks are trying to protect themselves from the pain that others in the public sector, where IR35 already applies, have had to endure, notably the BBC.

Currently, HMRC requires contractors in the private sector hired via intermediaries such as personal service companies, that work like other full-time employees, to self-assess their employment tax status and if off-payroll working rules are applicable, remit the right taxes.

The rules for the public sector were introduced in April 2017 and are being extended from April 2020 to medium and large private sector engagers. These new rules pass the requirement to assess the status of a worker engaged through an intermediary, such as personal service companies, to them.

Where the contractor is a deemed employee, they will need to be placed on the payroll for deductions of tax and NIC (employee’s and employers) together with for many the requirement to pay the apprenticeship levy.

Whilst these announcements by engagers do not necessarily mean they are not going to hire contractors via agencies or personal service companies what it does suggest is they think most if not all will end up on the payroll as deemed employees. This is undoubtably as they expect personal service rather than allowing for a substitute to be sent.

However, a word of caution to any engager who takes this route. They should make sure that it is not seen as taking a blanket approach to the new rules which require that engagers take reasonable care.

In the current reported cases engagers have stated new contracts will be issued which is to presumably put the contractors’ status beyond doubt and also create a clear difference between the old and new terms.  This would provide the contractor with some protection should HMRC enquire into the position historically, for prior to April 2020 it would be their responsibly under the current IR35 rules in the private sector.

What’s also clear is that these large employers have realised how much time is needed to consult with contractors and achieve the right result for all whilst maintaining a work force in the business. Who can forget the stories back in April 2017 when the public sector rules came in and contractors walked off sites?

Susan Ball is employer solutions partner at accountants RSM

Further reading: Off-payroll reforms misunderstood by the self-employed