IR35 - the Good, the Bad & the Ugly

If you're a contractor or hiring manager, you're more than likely aware that new IR35 rules were rolled out to the Public Sector in 2017 and are being rolled out to the Private Sector in April 2020

You may be aware that in April the private sector ‘hirer’, rather than the contractor, becomes responsible for proving that they are self-employed and not just a disguised employee

Are you aware, however, of how the new IR35 rules impacted the Public Sector and what is likely to happen soon in the world of Private Sector Tech hiring?

IR35 isn't the most clearly defined piece of legislation - a common theme these days given that many of us are still trying to get to grips with how to manage GDPR.  IR35 has been creating havoc in the Public Sector for two years now - but is the outlook all doom and gloom or are there positives?

We take a quick journey through the Good, the Bad and the Ugly of IR35 below so you can start making plans now to ensure you are working within IR35 and avoid some of the public sector mistakes of recent years

The Bad

What happened in the Public Sector?

  • The Government deemed that a contractor could not define their IR35 status – leaving it up to hiring departments to identify status' correctly or face penalties.  Many organisations, therefore, applied ‘blanket determinations’ and put their contractors ‘Inside  IR35’ to avoid being responsible for compliance and lost contractors needed for urgent projects. Rumour has it that the MOD lost the vast majority of its contingent workforce overnight and 71% of Public Sector projects suffered
  • NHS trusts were forced to raise pay rates for their contractors to retain them
  • Public Sector contractors left en masse to join the Private Sector (49% of contractors will only take on private projects now – Harvey Nash research)
  • Many Contractors joined Umbrella companies instead of keeping their limited companies to avoid issues (although Umbrella companies are only compliant in that they tax in the standard way)

The Ugly

IR35 Facts & Impacts

  • From April 2020 private sector employers hiring contractors will be responsible for determining their IR35 status
  • IR35 will only apply to businesses with turnover larger than £10.2 mill, more than 50 employees and balance sheet assets over £5.1m (maybe an advantage for startups)
  • Contractors can take the CEST IR 35 test to see if HMRC deem them in or outside IR35. In tests of 750,000 contractors 54% passed. There are penalties for companies who incorrectly declare their contractors as outside IR35, but if they pass the CEST test then the company is not liable. Companies will inevitably have little choice other than to insist their contractors sit the test!
  • ‘Bums on Seats’ contractors will not be allowed where an IT contractor works alongside Perm colleagues doing the same work
  • Company control over contractors will diminish with project managers no longer permitted to give specifications, tell contractors what to do or monitor progress weekly
  • Companies must review their current business practices as soon as possible, including onboarding and take steps to work differently ensuring that all hiring managers understand the dangers of non-compliance. Take the HMRC IR35 test to check if your contractors will be ‘inside’ or ‘outside’ IR35 - and get advice!

Likely impacts for businesses hiring tech workers

  • Contractors convert their work and turn to Permanent roles (driven by fear and uncertainty)
  • The Contractor pool will decrease as limited companies are dropped - making it hard to manage projects with highly skilled staff
  • The new IR35 rules will create more Permanent jobs on the market with more choice for employees, more competition and increased pressure to retain Permanent staff
  • Contractor pay will need to increase by 25% to cover the drop in take-home pay after-tax
  • Contractors may pursue work abroad, and the UK may lose many highly skilled tech workers (Brexit woes may compound this further)
  • Service companies spring up ‘contractor collectives’, and Umbrella companies pick up where some of the Limited companies cease to exist
  • Companies may suffer from non-compliant contractors/umbrellas if correct checks and balances not put in place

The Good

Are there any positives? Yes!

  • Companies will need to work differently - scoping out and declaring agreed milestones and deliverables performed in each contract and at what cost and timescale for ‘services delivered’- this may ultimately prove to bring a better return on investment
  • The onus is on the contracting business to supply adequate services (having helped define the deliverables) and to get on with the job (because they are the expert).  Clearly defined contract work may lead to better outcomes for both contractors and companies.  Contractors may find that they can only work on projects that use their expertise well, not mundane work that can be completed by a Permanent worker - therefore freeing them up to deliver quality work faster

  • If companies can get the process right, they may well manage to hire great contractors that other businesses aren’t able to
  • Small startups may suddenly find that they become highly attractive to contractors as they are too small to be inside IR35 – which may provide an excellent breeding ground for an increase in innovation and exciting new products (we need some optimism in the current climate!)

Added 9-Sep-2019