New IR35 Regulations: Calling Time on Contracting?
Last autumn, the UK chancellor announced that from 2020, tighter off-payroll tax rules (IR35) would be extended to cover contractors working for private firms.
The remodeled IR35 legislation is designed to crack down on disguised employment (reclaiming the Inland Revenue’s lost tax, National Insurance contributions (NIC), and apprenticeship levy). The Treasury expects this new measure to net £1.3 billion a year by 2023.
Contractor or Employee? IR35 Explained
The Government’s IR35 changes are intended to make the regulations more effective. Now, companies that use contractors will have to decide for themselves whether a particular contract falls within the bounds of the new IR35 rules. Three of the key principles are as follows:
How much supervision, direction and control does the company have over how the workers complete their day-to-day work?
Is it a personal service or can workers send substitutes?
Is the company obliged to offer work and are workers required to accept it?
Financial institutions will also be responsible for determining the employment status of each contractor or agency staff member. Plus, the fee payer (the company or recruitment agency) will be responsible for deducting tax and NIC at source.
Organizations falling foul of the new IR35 rules will have to pay the relevant taxes and fines which could amount to tens, if not hundreds of thousands of pounds.
It’s Open Season on Contractors
As you might expect, financial institutions are already making adjustments, with some major banks deciding that they may have to stop using outside contractors altogether: Morgan Stanley (June 2019), HSBC (May 2019). In addition, Barclays Bank has said that because technology is central to their business, they intend to hire an extra 2,000 tech employees and take the discipline in-house.
Of course, the banks’ bullish stance could drive talented and experienced freelancers (and a considerable chunk of IP) onto the grateful roster of more accommodating competitors. But whether it does or doesn’t, we believe that the reform of IR35 legislation will have a profound effect on the private sector. For an idea of the potential extent of its impact, look at what happened to the public sector when the same reform was rolled out in 2017:
Talent Loss. 7% of contractors left the public sector; 76% of projects and departments lost contractors; companies could not replace 38% of their contractors.
Increased Costs. 42% of contractors increased their rates.
Project Delays. 71% of projects were delayed or cancelled.
Admin Overheads. 80% of hiring managers admitted they’d seen a substantial increase in the workload for engaging and paying contractors.
How Do You Start the Ball Rolling? Good Question
Preparing for the new IR35 regulations requires careful planning. Every manager in a large or medium company that employs contractors should be starting the process now. So, here are just a handful of typical compliance questions:
How many contingent workers have you engaged? What are their names and roles? Who makes decisions on the employment status of your off-payroll workers? What are the various contractual chains?
How are you going to establish the facts for each engagement? Which compliance processes will you be following?
How will you deal with any workforce walkout, cost increase and tax liability?
What advice, resources or tools can you call on to inform your decisions?
How will you maintain a flexible workforce after April 2020? Are you prepared for knowledge transfer and staff transition? Are your projects, timelines and budgets ready for the change?
Is your organization capable of hiring the required number of people in such a short period?
Do your vendor partners have a solution?
Contractors have long been an intrinsic part of the working culture of financial institutions – an employment strategy driven by three main factors: flexibility, access to talent and cost. And, for contractors, it’s pointless trying to work out how to avoid IR35. The Government would like banks to increase the number of permanent staff and use consultancy firms and vendors to fill any resource gaps. Looked at in that way, the new IR35 rules could be seen as a welcome opportunity for financial organizations to review and refresh the traditional cultural mix, considering other cost-saving options like nearshoring, perhaps.
Working Better, Cheaper and Smarter, Neighbor
Lower costs, robust competence and high-quality work are not the only advantages of adopting nearshoring. Proximity and shared culture are also critical for efficient collaboration. Working within the same time zone and business hours means that issues can be resolved in real time, reducing operational frustrations and saving precious resources.
As with most regulations, the reformed IR35 legislation is both an obstacle and an opportunity. Which takes priority depends on your organization’s appetite for change. But one thing’s certain. You’ve got less than a year to get your house in order so, if you haven’t already, you need to start planning for IR35 regulations.
Mark has 14 years’ experience of Financial Services technology, enabling strategy and business growth in a variety of client-facing leadership and business development roles. He specializes in working with nearshore technology delivery organizations, having built and led teams across Central and Eastern Europe.