The remodelled IR35 legislation is designed to crack down on disguised employment, i.e. reclaiming what the Inland Revenue sees as lost tax, National Insurance Contributions (NIC) and apprenticeship levy. The Treasury expects this new measure to net £1.3B a year by 2023.
Contractor or employee? IR35 explained.
The latest IR35 changes are aimed at making the regulation more effective. From April 2020, companies that use contractors will have to decide for themselves whether each individual contractor falls within the bounds of IR35. Three of the key principles are as follows:
- How much supervision, direction, and control does the company have over how the worker completes their day-to-day work?
- Is it a personal service, or can the worker send a substitute?
- Is the company obliged to offer work and is the worker required to accept it?
Organisations 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.
Open season on contractors.
As might be expected, financial institutions are already making adjustments, with some major banks deciding that they may have to stop using external contractors altogether:
Of course, the banks’ stance could drive talented and experienced freelancers (and a considerable chunk of intellectual property) onto the roster of more accommodating competitors. But whether it does or not, 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 back at the effect on the public sector when the same reform was rolled out in 2017:
7% of contractors left the public sector; 76% of projects and departments lost contractors; companies could not replace 38% of their contractors.
42% of contractors increased their rates.
71% of projects were delayed or cancelled.
80% of hiring managers admitted that they had witnessed 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 will take time. Every manager in a medium or large company that employs contractors should be starting the process now to be ready for April. Here are just a handful of considerations:
- What roles do contractors perform in your organisation? Do you rely on them for specialist skills or do you depend on key person?
- Who makes decisions on the employment status of these ‘off payroll’ workers? What are the various contractual chains? How will you establish the IR35 status?
- How will you deal with any workforce walk-out, cost increases, and tax liability? Are you prepared for knowledge transfer and staff transition? Are your projects, timelines and budgets ready for the change? Is your organisation capable of hiring the required number of people in such a short period?
- What advice, resources, or tools can you call on to inform your decisions?
- What will you do after April 2020 to access specialist skills or maintain a flexible workforce?
- Are your vendor partners aware of the impact of this legislation? Do they have a solution?
Working better, cheaper, and smarter.
Lower costs, robust competence, and high-quality work are only some of the 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, thus reducing operational frustrations and saving valuable resources.
As with most regulations, the reformed IR35 legislation is both an obstacle and an opportunity. Which of the two takes priority depends on your organisation’s appetite for change, but one thing is certain – you have less than a year to get your approach in order. If you have not already, you need to start planning for the IR35 reform.