The potential impact of IR35 on ITAM

Disclaimer: I’m no IR35 expert! There are those in the industry who know a lot more about it than me. This blog is just my thoughts on the impact IR35 will have on the ITAM market. Thanks, David

For those of us in the UK working in the Private Sector, March marks the last month before the dreaded IR35 regulation comes in to play. For those outside of the UK, IR35 is a piece of legislation that allows the tax man to tax a contractor a high-rate if they are considered to be doing the role of a permanent member of staff (in a nutshell!).

Before IR35 came in to play, it was up to the contractor themselves to identify whether or not they were doing the role of a permanent member of staff and therefore Inside IR35.

The aim of IR35 is for the tax man to find those fiddling the system and not paying enough tax.

Come April 2020, it is now up to the hiring organisation to define a contractors IR35 status. Thanks to a lack of guidance or information from HMRC (Her Majesties Revenue and Customs), a lot of organisations have said they are no longer working with personal services companies – aka those that work through their own Limited company – or that everyone will be inside IR35 as they are worried HMRC will come after the organisation as a whole and fine them.

What does this mean for the UK ITAM market?

Definition: Contractor v Consultant

In my opinion, a contractor is someone who works for one client taking on a role for a set period of time (such as a fixed-term 12 months, or a 6 month day-rate gig).

A Consultant on the other hand has multiple clients that they work for either part-time for full-time in more of an advisory basis. Their clients can be international or local and usually focus around a specific project.

Impact on Consultants

The impact on Consultants should be minimal. Having multiple clients or a defined project means that consultants are outside of IR35 and can operate normally. They are not doing the job that a permanent member of staff could fulfil.

Consultants typically have their own website, branding, partners and agreements with other customers so have further evidence that they are working outside of IR35. International clients helps too!

Impact on Contractors

Sadly, the impact has already been, and will be quite big on contractors. As organisations look to blanket assess all contractors as being inside IR35 or that they simply won’t work with anyone who isn’t on a fixed term contract. For those ITAM contractors not paying the right amount of tax then this is fair enough and it’s your own fault for not managing your accounts properly.

For those honest, hardworking contractors who are fully up-to-date with their tax returns, a role within IR35 means a reduction in pay. I’ve heard some organisations reducing day rates by up to 20% on-top of the contractor now having to pay additional tax.

Others have the same day rate but are hit with having to pay additional tax so their take home pay is less. That said, this will have an impact on their corporation tax so you’re not totally losing out.

For example; if you were an ITAM contractor on ￡400 a day, before IR35 you net would be ￡5,090 per month. Inside IR35, that same ￡400 per day would now equate to ￡4,181 – a reduction of 21%. To match your previous take home on ￡400 a day, you’d have to increase your day rate to ￡522. I can’t see many employers increasing a day rate that much!

https://www.contractorcalculator.co.uk/ir35calculator.aspx is a fantastic tool for working out the differences if you’d like to know more.

Scramble for Permanent roles

Without scaremongering, I think we could see a scramble for existing contractors going for permanent roles as the contract market dries up over the next few months. This could also see the perm salary market increase as contractors look to find a role that is close or close enough to their previous day-rates.

Could we go from a skills shortage to a job shortage? I don’t think that’ll be a problem, but contractors on large day rates previously who don’t want to go down the consulting route may have to accept the fact that they will be taking a significant pay cut.

On the other side of that argument there may be contractors who want to sit it out for a few months and see what happens. Due to the lack of clarity and confusion over the IR35 regulations and various reshuffles within the government, we’re not 100% sure how the market will react or the impact IR35 will really have. I know a few people taking this route as they want the ‘dust to settle’ before making their next career move.

Don’t worry!

HMRC initially said this change would only impact those who are purposely playing the system. However, that has not been the case as it’s actually impacting the majority of the IT contract market. Sure, it sucks at the moment but there are options.

The market is quite flush at the moment with perm roles, so you won’t be going hungry! Also, there are some Inside IR35 contract roles available should you want to go down that route too.

I’m a true believer that if you’re good at what you do, things will always work themselves out. This is no different. Keep going, keep adding value and if you have any questions please don’t hesitate to ask and I'll do my best to help.