Are you prepared for the upcoming IR35 Reforms / UK Contractor market shake up?

Are you prepared for the upcoming IR35 Reforms / UK Contractor market shake up?

Blog by Richard Harrison – Xpertise Managing Director and 20-year industry veteran

The biggest UK IT talent market shake up for 20 years is coming, are you aware and are you prepared?

Firstly, what is happening?

I can confirm that HMRC have passed legislation meaning that from April 2020 Private Sector Employers will have to determine a Contractors IR35 status. Let me say that again, the end user hirers (The Client) will determine the tax status of a contract assignment, not the recruitment agency and certainly not the contractor nor their Accountant.

This means employers now have less than 8 months to prepare for the changes!

This follows on from the April 2017 legislation which brought the exact same legislation to the Public Sector.

I should point out that the IR35 Private Sector impact has been limited to large and medium-sized businesses with 50 employees or more and those with either turnover or assets of ￡10m or more, but this is still going to have an impact industry wide with increased costs and administrative burden.

Let me explain the background to this new legislation.

In recent years, there has been an ever-increasing number of people using personal service companies (PSC) or limited companies as more commonly described to contract to UK businesses and it is quite easy to argue that one of the main reasons for this is the noticeable tax benefits for the person operating through the PSC.

It’s estimated that 15% of the UK population are now freelancing and HMRC estimate the cost of IR35 non-compliance to the treasury was projected to increase from ￡700 million in 2017/18 to ￡1.2billion in 2022/23.

So, this new legislation is HMRC’s way of re-balancing their tax coffers to counter the increase in freelancing and non-compliance (in their eyes!).

More background…

In April 2000, HMRC introduced the infamous IR35 legislation which was meant to differentiate between a business operating as a genuine business versus an independent contractor being a “disguised employee”.

It is important to note that the original IR35 legislation has NOT changed.

For a contractor to be outside of IR35 there is certain criteria which must be met; in my view the most important aspects are that you must not be under the control and direction of the end client (the right to substitution helps drive this point home), and you must demonstrate business risk.

The rollout of IR35 into the Private Sector is, justifiably, a huge concern for contractors and employers alike. In the Public Sector, it led to an increase in permanent vacancies, contractors using umbrella companies and an increase in daily rates.

I predict that in the medium term, there will be a little less work for contractors as employers look to convert as many Contractors as possible into permanent roles, combined with the worry that new legislation poses. Then things will settle down and gradually revert to type albeit with probably less supply of talent.

A recent survey by APSCo showed that the number of IT contractors out on assignment in August 2018 was 30% lower than August 2017, Ann Swain, chief executive of APSCo, commented,

“It seems that, against the current backdrop, businesses are locking in vital skills that are becoming increasingly harder to source on a contingent basis.” These figures can "largely be attributed to recent changes -- and further anticipated amendments -- to IR35 legislation, making non-permanent employment a less attractive choice”.

This new legislation in my view is going to test the reason people go contracting in the first place. Is it for the variety of work assignments, the ability to in theory work more flexibly, the ability to earn similar or higher amounts without the pressure which goes with internal management / leadership / politics OR is it that you can do the same role but earn more doing so?

It is important to remember that the UK contractor workforce provides huge benefits to businesses in terms of flexibility, access to top talent and the ability to deliver quicker. It is essential that we work hand in hand to ensure that employers do not lose access to this resource pool and we at Xpertise will also be working hard to support our Contractors to minimise their risk and with Clients to ensure they do not lose access to that talent pool.

There is also a real risk to businesses of large increases in costs if this is not managed correctly. At least I have seen at first hand the impact on some of the daily rates in the public sector as a result of the 2018 Public Sector IR35 reforms. There are many examples of daily rates jumping by ￡200-300pd!

For Contractors who become inside IR35, Contractors employers National Insurance will now become due on top of the rate paid to the contractor. Imagine a contractor in demand who travelled and stayed 4 nights a week to deliver their services could result in a 43% increase in total cost to the client, if they decided to put them on payroll whilst keeping the contractors take-home-pay the same!

This is the biggest shake up in the UK talent market since 2000 because from next year this will impact ALL UK contractors not just those in public sector.

3 years ago, I predicted that the UK talent market would move more towards a US model whereby contractors are by enlarge PAYE / umbrella company focused and this prediction is clearly more real than ever.

But where there is change there is also the opportunity for smart employers to attract, hire and retain valuable contract resources. Clearly if as an employer you place all your contract roles as inside IR35, contractors will look to move on to employers where assignments are outside IR35! It will make the decision on which contract the contractor selects a little more complex. I predict an increase in the number of contractors turning down contract offers for being inside IR35, in the short to medium term at least.

At Xpertise we now have more than 12 months experience managing inside IR35 versus outside IR35 contracting assignments and 60% of roles we worked are still outside of IR35 in central government at least.

Be careful to listen to all those Umbrella companies who are scare mongering contractors to sign up with them! Contractors who end up working inside IR35 contracts will end up signing up with Umbrella companies, but I believe the majority will NOT have to in our IT / technology markets at least.

Given our experience working with public sector employers, Xpertise have the experience to manage the onboarding process to de-risk this issue for both employers and contractors.

In the IT, Tech and Business Change markets we operate in I would expect the private sector to be able to support more outside IR35 assignments than in public sector where many organisations were scared by the penalties of non-compliance and so created blanket inside IR35 statuses for their Contractors (even HMRC says this approach is not legal!).

It is crucial that businesses start to prepare as early as possible for the reform to minimise any impact. For contractors nothing really changes until just before the deadline when you will need to understand whether your assignment is inside or outside IR35.

Remember the clock will start from April 2020 so nothing before that point will be deemed in scope. I saw many contractors needlessly walk away from their Contracts for fear the previous assignment would be caught inside IR35. 

To help employers with your preparations, we have created a calendar outlining the steps you need to take and when they should be completed for as little disruption to your business as possible.

To help contractors, basically there is nothing to worry about or do until Q1 2020. The Xpertise team are happy to suggest a few pointers and things to think about actioning in the meantime to improve your chances of being outside IR35.

In the meantime, please share this blog if you found useful!