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How to ensure consultants and employers remain IR35-proof

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As the April 2020 deadline looms for the application of IR35 legislation to the private sector many contractors and employers are still rushing to prepare. Both are fearful of IR35’s impact and this is leading them to make significant changes to how they work and employ.  A number of UK businesses have already moved away from hiring contractors and a significant proportion of the contract workforce is considering whether it is time to take a permanently employed role.

Despite there being only weeks to go until IR35 it is still possible to be IR35-proof.

IR35, uncertainty, issues and impact

Businesses may be discovering IR35 is more complex than they initially envisioned, turning them away from hiring contractors. The burden of tax and NIC administration is being pushed back to organisations, adding costs. The risk of HMRC finding a contractor is in fact “inside IR35,” meaning they are more employee than business to business service provider, after April, is that their tax and NIC penalty may then fall to the employer or the contractor’s agency.

Businesses are also concerned that contractors and umbrella companies will hike their rates to compensate for the hassle, and loss of revenue, from IR35. They are also becoming aware that IR35 could impact and even impede their growth, adding further business risk. Within industries, like IT, where there is already significant pressure on the labour market due to skills shortages, IR35 is adding additional strain.

Contractors and consultants are keen to retain their contracts whilst avoiding massive tax hikes if they are deemed to be “inside IR35.” For some, the risk is too much and rather than being forced to lose a contract that’s deemed to be “employment,” or take that permanent role without any other option, they are choosing to move to permanent employment now.

Much of the uncertainty, causing contractors and employers to simply step away from contracting, stems from an unknown level or risk. Instead of simply looking at paper contracts to assess a contractor-employer relationship, HMRC will look more at the nature of that relationship and may want to go back over a substantial period of time.

There is also little trust for the Check Employment Status for Tax (CEST) Tool deployed by the government to understand if a contract falls within IR35 and thus should be classed as employment for tax purposes.

A Brookson Legal study in 2019 found that 48 per cent of businesses are likely to reduce the number of contractors they hire because of IR35. It also discovered that 32 per cent were worried about wrongly categorising workers, 33 per cent believed that IR35 would lead to them lose vital talent and 39 per cent believe it will lead there to be fewer contractors in the labour market.

Companies like Barclays, HSBC and Morgan Stanley for example, have already made the decision to no longer engage contractors either through limited companies or agencies.

Preparing for IR35

As IR35 grows on the horizon, the rush that is ensuing has been in part caused by a missed understanding of its complexity. There has been some time to prepare for IR35, but the uncertainty now negates any preparation for some who are simply seeking alternatives to contracting.

On the run up to IR35, companies are deciding whether they can continue to contract workers and if their arrangements with contractors and consultants fall outside or inside of IR35’s remit. Where some have assumed this assessment could be on a broad basis, HMRC has confirmed it will look at IR35 on an individual basis. Therefore, any preparation by employers should included a case-by-case analysis and communication with contractors facing the same uncertainty.

Contractors too, risking much higher tax bills, must determine if the work they conduct is more aligned with employee status than business to business service provider.

The CEST Tool

As already mentioned, the CEST Tool is surrounded by concerns. It was implemented in 2017 for the public sector’s move to IR35. It’s worth noting at this point that the implementation of IR35 in the public sector led many contractors to move their services across to the private sector, to avoid the complications and potential penalties of IR35.

The CEST Tool’s purpose is to determine if an individual’s contract falls within IR35 and therefore should be classed as employed or self-employed for tax purposes. It asks questions such as whether a limited company is involved, if the worker is able to send a “substitute” in their place, if the contactor has an on-premise office, what control the company has over the contractor, if there are any benefits, how issues are managed and what pay structure is in place.

What the CEST Tool does not appear to take into account is “real-life” scenarios, i.e. agreements specific to the company contractor relationship, which may be directly prudent to the IR35 qualification.

After April 2020, the end of a flexible workforce?

Contractors have for some decades served to meet high-skilled work gaps in many sectors, particularly in IT. They have provided niche technical skills short term, at short notice, and long term. They have met reactive and proactive resource demands from companies under pressure from, or innovating within, accelerating digital transformation and the growing skills shortage across the UK.

Moving forward, once IR35 comes into effect, the UK contractor market is likely to shrink. Employers won’t look as quickly to hire contractors for jobs that could be at risk of falling under IR35. Those still willing to offer contracts may do so more readily for only the hardest jobs to fill.

It is conceivable that more companies will choose larger IT service providers instead of contractors, moving to managed service provision to avoid the employment and contract issue entirely.

With less contract roles on the market, and to avoid potentially losing up to a quarter of contract earnings to tax, consultants and IT professionals may seek permanent roles either directly or with IT managed service providers.

Avoiding IR35 risk

IR35 is certainly set to squeeze the contractor market, so too limiting the availability of skilled technology professionals.

To mitigate the impact of IR35 companies can choose from a number of approaches. Firstly, there is still time to assess and prepare a contract workforce for IR35, ensuring that contractors who remain are operating as service providers rather than employees.

Those who wish to step away from the implications of IR35 must investigate other ways to meet their human resource needs. Hiring and training permanent employees is certainly an option, but one that will be faced with the challenge of the skills gap and the need for substantial investment of time and finance.

An alternative to hiring to meet IT needs, at a time when companies must innovate to survive and need also to answer the ongoing demands of GDPR and cybersecurity risk, is to contract not an individual but an IT services company.  Moving to externally managed IT services, like testing, cybersecurity, or even a fully managed IT service, hands over the pressure of IR35 entirely. It could also add benefits, such as the knowledge that a corporate provider retains client system and business knowledge, even if a contractor moves on.

Contractors stepping away from IR35 can also benefit. Managed IT service vendors, as they meet the market created by IR35 uncertainty, also offer an opportunity to contractors seeking permanent roles. Working for a service provider, with multiple clients, delivers the same job variety many contractors have come to enjoy. They can also thrive with the training and development prospects absent from a contacting career.

Though IR35 is indeed a challenge, it also creates a juncture in the UK’s digital transformation allowing an opening for organisations to streamline their IT provision and for skilled IT workers to return under the wing of employers able to nurture their expertise further.

Richard Mort, director, Edge Testing Solutions

Richard Mort is a director at Edge Testing Solutions, and an ex-contractor. He has over 38 years of experience in IT and 25 of those in software testing.