The introduction of new tax legislation in recent months (IR35) has had a huge impact on both organisations and contractors.
For medium to large companies that regularly used contract workers, IR35 changes have forced them to look to hiring permanently or using intermediate umbrella companies. For those businesses, and many contractors, it has been felt there is no other option. Contractors have taken permanent roles and have lost the ability to regularly work with different organisations and sectors and companies are finding experience people hard to come by.
IR35 changes in a nutshell
The rule changes involved ‘off payroll working’ – so it included any workers providing services through an intermediary. It impacted end-clients, recruiters and all contractors working through limited companies.
- The legislation applies only to medium or large businesses (more than 50 employees and annual turnover less than £10.2 million). Small businesses are exempt.
- The new rules determine whether off-payroll workers are bona fide contractors or ‘disguised’ employees.
- The end-client is now responsible for determining whether a contract is ‘inside’ or ‘outside’ of IR35 rules
- HMRC use a series of different tests to determine whether contractors are ‘disguised employees’ looking at 4 key areas – Control & Direction, Substitution, Mutuality of Obligation and Exclusivity.
- If a contractor is deemed to be ‘inside’ IR35, the end client must deduct employees’ NICs and income tax, on top of paying employers’ NICs.
As the tax responsibility now lies in the hands of the end client, the biggest challenge with the IR35 reforms is managing the administrative and financial burden of signing contractors and consultants. If a contractor is acting akin to a direct employee of the organisation they are providing services to, they will be classed as inside IR35 and the company will have to pay up. From a pure administration perspective, managing multiple individuals and contracts across different areas of the company will also place additional pressure on in house HR and finance teams.
That might explain why some of the nation’s highest profile companies have announced that the changes will limit their future use of contract staff. Pharmaceutical giants Glaxosmithkline stated over two years ago that it would ‘phase out Limited Company contractors’ from its workforce from early 2020. Financial institutions RBS, HSBC and Barclays have also introduced blanket bans on the use of contractors.
It’s a confusing and complex picture for the nation’s full-time contractors, and for the corporate world. As harsh as it sounds, the overarching message seems to be ‘Go PAYE or umbrella’. Many businesses feel the legislation is difficult to interpret and that it will be a struggle to assess accurately whether working arrangements fall inside or outside of IR35. The ball is firmly in the court of the end client – getting it wrong will leave them open to significant financial penalties and the risk of reputational damage.
Hire Perm and Stop Engaging Contractors? Maybe there is another way to bring in shorter term expertise?
The third option…
For those medium to large businesses that relied on contractors, there are two obvious options. Either stop employing contractors and hire full time employees. Or invest in additional HR staff to shoulder the increased administrative workload. However, there is a third option that enables businesses to continue using expert practitioner contractors without falling foul of IR35.
A sensible solution would be to use a professional services company, one that could provide the required specialist contractors under a formal Statement of Work (SOW). The professional service company would effectively be a third party provider, producing an SOW based on fixed outcomes and deliverables, versus an individual providing the service. The status risk would then lie with the professional service company and the end client would not be responsible for the IR35 burden - who would in turn meet all the concerns around Control & Direction, Substitution, Mutuality of Obligation and Exclusivity.
This option could potentially save the end client a huge mountain of work, simply by having a service agreement with a third party provider based on resource types, rather than named individuals. One consultant from Livingstone, the world’s largest independent financial advisory groups has been quoted saying using such third party providers is a probable scenario now the new IR35 rules take effect.
“Corporates are likely to switch the procurement of project-related services away from contractors and towards consulting firms operating under a specific statement of work,” said Will Evans, Associate Director, Livingstone.
There are many UK industry sectors that are heavily reliant on contractors to provide expertise for short term projects – from IT and automative industries, to finance and construction. Using external consultants, as opposed to going through the entire recruitment process to employ a new staff member, is a tried and tested way of getting expert support quickly and cost-effectively. Whether it’s a team of software consultants working on website upgrades, or a financial planning specialist working on a new company strategy.
The new legislation is now in play and medium to large businesses up and down the country will face a new tax challenge. Right now, it’s decision time and companies need to assess the benefits of contractors versus PAYE, and short term external expertise versus longer term internal experience. For many the third option may prove to be the best of three. By using a professional service company, UK companies can still achieve the same successful outcome on projects without being directly affected by the new IR35 rules.
Accelerate are a professional services consultancy, an expertise marketplace, who offer IR35 compliant managed services to our end clients. If you would like to hear more about how we can deliver the desired outcomes for your organisation, please get in touch.
