IR35 – could this be the end of the contractor/interim?

On 6th April 2020, the private sector will follow the public sector in applying new rules for the management of off-payroll contractors.

Where does IR35 derive from? This is a piece of legislation originally introduced in 2000 and was further developed in 2017 for contractors in the public sector. If a contractor is operating through an intermediary, such as a limited company or Umbrella company, and except for that intermediary they would be an employee of their client, IR35 will be applicable. You can read more here.

Contractors, interims and freelancers have long been a resource businesses have lent on to deliver projects or when extra skills are needed and not present ‘inhouse’ without having the admin and legal burden of employing a permanent head. Is it possible that IR35 could threaten the whole existence of using contractors and thereby will cut off a much relied upon bank of talent?

IR35 was originally introduced in 2000 and it was here that the liability for deciding the tax implications of the work fell onto the contractors and interims themselves. This led to many contractors becoming Ltd companies and paying themselves through this vehicle and calculating corporation tax etc. However, 20 years later, the Government is seeking to ensure 100% compliance from contractors with regard to them paying the necessary NI and income tax liabilities for the work they are undertaking. Hence they have tightened these regulations considerably and moved where the liability for the tax payments now lie. Is it a step too far? Only time will tell.

The new IR35 regs have been applied to public sector clients since 2017 with Government departments et al having to assess each and every temporary vacancy to determine the status of employment for tax that their contractors/interims should be working under. Now, by treating contractors as employees ‘within IR35’ the government is said to have raised over ￡550M in taxes from the Public Sector in the first 12 months since introduction. How much will it benefit from the Private Sector?

At our recent Finance Directors’ Seminar, Qdos Contractor presented the changes and how and which private sector firms will be affected – some private sector firms (mainly micro businesses) are exempt from the new changes. However, as we move towards the 6th April implementation, there is much scrambling amongst larger private sector firms to ensure compliance is in place. Tactics such as renegotiating contracts and appointing interims to become permanent members of staff has been commonplace.

Meanwhile, contractors and interims are also changing their plans and have been seeking advice. This change in their strategy has been welcomed by some, but in the main this is a pain that helps no one. Contractors have stressed that their living costs remain the same so they want the equivalent take home pay if transferring from a Ltd contractor to a PAYE worker. However, employers have said they don’t want any increase in worker costs and the agencies in the middle can’t take all the hit as they will be losing money having the temps out working. The best solution is for everyone to take a hit – contractors take home less, employers pay a higher charge rate and agencies lose margin. Not a great outcome for anyone except the government.

When this was introduced in the Public Sector, many contractors left and moved into the Private sector as they didn’t want to become a PAYE worker, take home less money for doing the same job. However this time, the Private Sector workers have no place to escape to. It’s going to be interesting.

Recently, it was predicted IR35 could be reviewed and not introduced in 2020; however, this was incorrect. It’s happening. Businesses and professionals need to be prepared for this change. Like the public sector, in time, the private sector will become used to the new legislation. There are bumps in the road to cross.

The growth of the self-employed sector has added ￡bns to the UK economy since the 1970s and it has huge benefits for companies wanting a flexible workforce, often with specific skills. There is a fear more talent will have to work directly – permanently – for organisations rather than offering niche skillsets sought by businesses seeking to launch/complete a project, for example.

What is inevitable is that employers now have more admin to do before even starting their recruitment process, project costs will go up because renegotiated contracts with talent will increase as contractors fight to keep their take home pay the same, and this will make a low unemployment job market even more challenging.

Please click here to read the notes from Qdos Contractor from IR35 event in November 2019. If you are a professional contractor, do call us so we can guide you on moving to an Umbrella company or the other strategies you could apply.

We’re here to help our clients and candidates navigate these waters.

Roland Seddon, Managing Director