Is IR35 set to deliver a workforce headache come April?

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.”