Preparing for IR35 in the private sector: lessons from the public sector
It is less than a year before IR35 off-payroll rules are extended to the private sector. April 2020 may sound far away but some of the contracts you sign now, either as a contractor or client, will eventually be covered by the new rules. Do you understand the impact this will have on your business and are you ready?
The IR35 Changes
The new IR35 rules were introduced to the public sector in 2017. They make it the responsibility of the employing business, not the contractor, to determine whether a role sits inside or outside IR35 and which tax rate should properly apply.
What impact did IR35 have on the public sector?
Whilst predictions of Armageddon proved to be overstated, the introduction of the new rules have had tangible and ongoing impacts on public sector use of contractors and associated risks.
1. IR35 rules made it harder to recruit and retain skilled contractors
In the immediate period after the introduction of IR35, 8% of contractors did not renew contracts as they came to an end. A year later, in 2018, more than half (51%) of public sector hiring managers reported losing skilled contractors because of the introduction of IR35, while nearly three-quarters (71%) were facing challenges in retaining contractors.
In 2019, jobs advertised as within IR35 attract 40% fewer applicants than jobs outside.
2. IR35 rules make it more expensive to hire contractors
In the first 12 months following introduction of the new rules, 42% of public sector contractor rates rose to offset the IR35 changes. By 2019, approximately 80% of contract rates inside IR35 have risen to offset the impact.
3. Non-compliance risks have increased
It goes without saying that the introduction of new rules increases risk of non-compliance with those rules. In this case that increase has been fuelled by widespread uncertainty over how IR35 status should be determined.
To be frank, HMRC haven’t helped. Their Check Employment Status for Tax (CEST) tool has been shown to be inaccurate in multiple cases and several legal cases utilising CEST results are underway. As employers are responsible under the new rules for determining the status of contractor roles, this uncertainty creates increased compliance and legal risk for them.
4. Blanket assessments increase risk
In response to uncertainties over status, and an understandable desire to manage the scale of the task, a number of government agencies used blanket or role-based assessments, which typically determined contractors to be inside of IR35. While this appeared, at face value, to have simplified the task, there are several litigations underway over this approach which could leave the employing organisation liable for claims by both the contractor and HMRC. So, risk may have increased in the medium term.
In summary, for poorly prepared organisations, the introduction of IR35 to the public sector increased costs, risks and workload, while exacerbating already challenging capacity shortages. These costs are largely borne by employing organisations, making it even more imperative to optimise your use of contractor resources. Furthermore, attempts at mitigating poor preparation by applying simplistic blanket approaches to assessing status, while attractive in the short-term, may actually increase risk to the employer.
How can the private sector prepare?
It is reasonable to assume that the extension of IR35 rules to the private sector in 2020 will have a similar impact as it did in the public sector and that the severity of impact will depend on how prepared the organisation is. Luckily, there are several examples of good practice from the public sector which can help.
a. Move to services-based contracts
Several public sector agencies now go to market for services rather than contractor roles. Normally contracts are for 1 to 2 years and based on a skills framework with statements of work for each call-off. This approach effectively moves the IR35 compliance risk to the service supplier. It also reduces costs, and associated budget risks, as rates are fixed with the supplier for the duration of the contract.
b. Put in place clear hiring policies
One of the most positive aspect of the new rules has been an opportunity to review and refresh hiring policies and practices. Organisations which integrate and document IR35 assessments into clear technology skills hiring policies, not only reduce IR35 compliance risks, but improve contractor productivity and utilisation as well.
It is important to recognise this as a task which impacts the whole business, not just HR or IT teams. Almost all businesses are technology businesses now. Having recruitment and retention policies which optimise the use of IT contractors is essential to achieving critical technology objectives which underpin future growth and other goals.
c. Extend supplier management to include contractors
IR35 is intended to address the problem of employees being treated falsely as self-employed. So IR35 genuinely shouldn’t apply to most IT contractors who are providing specialist services to achieve specified outcomes on time-limited contracts.
Extending supplier management so that IT contractor engagements are, where appropriate, treated like suppliers clearly marks contractors as ‘not employees’. Furthermore, good supplier management practices like specifying outcomes, managing progress, and using commercial models such as risk/reward will also provide the added benefit of enhancing the value you get from engaging contractors in the first place.
April 2020 isn’t that far away. A contractor hired today on a one-year project will still be in place when the IR35 rules are extended. The time for the private sector to act to mitigate the impact of the rules, and optimise the opportunities they offer, is now.
bedigital can help your organisation to embed best practice in hiring contractors and to understand the impact, opportunities and challenges of applying IR35 rules.
Get in touch on firstname.lastname@example.org to discuss how IR35 will impact your business and how you can best prepare.
1. Joint Research report June 2018 - Chartered Institute of Personnel and Development (CIPD) and the Association of Independent Professionals and the Self Employed (IPSE)
2. bedigital data