A year after UK chancellor Rishi Sunak delayed controversial IR35 reforms for the private sector, they are set to be introduced in April. But is the C-suite ready for this extra burden?
The change puts the onus on medium and large-sized companies to assess whether work done by contractors, and how they carry it out, classes them as employees. If it does, this would move them to PAYE, paying the same income tax and national insurance as the rest of the employed workforce and potentially having benefits such as holiday or sick pay and a pension.
Many claim IR35 will damage the consultancy economy, leading to a brain drain overseas. Its supporters cite illogical differences in the tax take from employees when the working environment and rules contractors must adhere to are often the same.
Josh Mathias, managing director of engineering company Hythe Group, explains the complexities: “In engineering, it’s natural to have surges and dips in work demand. We’ve been monitoring this and preparing for the inevitable migration all year.
“We will employ those who sit within the IR35 requirements and we will use umbrella services to support those who still come under contractor status. This is a tough distinction because those who fit under ‘contractor status’ with our definition are often working for other companies that have a blanket rule for being inside IR35. Therefore, we have to increase the amount we pay to the ‘umbrella workers’ to help them contribute to the National Insurance they have to pay as a result.
“We are having to restructure our contracts, payroll and management to suit a PAYE structure, over contractor structure. It will change the way we operate significantly. The additional costs to the business are huge and the changes to the workers’ way of life will also be altered, their flexibility, the day-to-day expectations of them, their freedom to choose places to work and contracts to work on. There will also be short-term effects, leaving lots of people in limbo while companies restructure to ensure they are 100 per cent compliant.”
Why blanket bans are not the answer
Clarke Bowles, head of key accounts at Parasol, a so-called umbrella company, suggests the blanket bans Mathias refers to could prove bad for the businesses adopting them. He says: “It effectively puts everybody in a tax position similar to that of being inside IR35, regardless of their working practices. In this situation, there are no winners as contractors will move contracts to find higher rates outside IR35, and companies and agencies may need to increase rates or lower margins to keep hold of valuable contractors respectively.
“HM Revenue & Customs pushed forward with IR35 reforms because one third of limited company contractors were reported to be working non-compliantly. However, this leaves two thirds of contractors working compliantly. Companies that blanket ban rather than deal with IR35 through accurate assessment and compliance will inevitably lose out on top talent in the long run.”
James Poyser, founder of offpayroll.org.uk, a site where contractors can anonymously rate end-clients on their approach to IR35, backs this up with feedback.
He says: “Fair assessments and sound working practices are helping some brands pull away from their competitors. They are continuing to use short-term talent to deliver strategic projects when others are struggling, simply because they haven’t taken the approach to ban flexible skill from the supply chain. By taking a compliant and fair approach, they can compete for the very best talent.
“The feedback really points to the fact that brands banning contractors are alienating self-employed professionals. The contingent workforce is actively seeking out the fair-end clients and won’t entertain contracts that fall inside IR35.
“Many end-clients think it’s a buyers’ market for contingent workers and in many areas this is true. However, there continues to be critical skills shortages, mainly in tech, and the self-employed professionals in these areas know it.”
Take steps now to avoid IR35 repercussions
Caroline Colliston, corporate tax partner at global legal business DWF, suggests more education is still needed as there are “large swathes of the contractor and business population that do not understand the new rules well enough or how these may impact their businesses”.
However, Colliston points to opportunities for some businesses as IR35 offers the chance to simplify their approach to engaging contingent labour, while regulating relationships with contractors that continued over years without sufficient review. Preparation should also include having processes to deal with any disagreements.
She adds: “This will require understanding who is in the contingent labour population in a business, reviewing the contracts in place and any statements of work in the context of what is happening on the ground. Training everyone in the business engaging and hiring contingent labour will be key too from legal and HR to procurement and facilities management. This legislation can permeate every aspect of a business.”
But while, according to HMRC, there will be no penalties for inaccuracies in the first 12 months, unless there’s deliberate non-compliance, taking appropriate steps right away is key.
Debbie Sadler, senior associate in the employment team at Blaser Mills Law, concludes: “Businesses must be aware that if the new IR35 tax rules apply to them, they can expect to pay around 25 per cent more in tax a year. They should take time over the next few months to understand how the legislation works, apply best practices to remove the risks and prepare defence in case of an investigation by HMRC. We are likely to see some serious repercussions for hirers and contractors who fail to prepare for compliance.”