The Critical Considerations Surrounding IR35

2020 is going to be a momentous year. Japan will host the Summer Olympic games, the U.S. will hold presidential elections, Dubai will dazzle the planet with a World Expo, and the U.K., faced with the exit from the EU, will change how it manages IR35 in the private sector.

For organisations across the U.K., IR35 presents an unwanted risk that carries significant implications and requires direct attention. Many will be looking back at lessons learned from the public sector, where changes introduced back in 2017 led to disruption, high-profile disputes, and several investigations from HM Revenue and Customs Department (HMRC).

So, it’s unsurprising that several U.K. companies have already responded with a risk-averse stance, making blanket decisions not to engage limited company contractors, or providing contractors an offer to join the payroll or quit. While this seems like a logical approach to eliminating any compliance risk, it means losing out on some of the crucial benefits of engaging with contractors, including capacity, capability, and flexibility.

What’s changing?

For those of you unfamiliar with IR35, it’s a legislation designed to reduce tax avoidance by contractors who HMRC believe to be ‘disguised employees’ – or those who work like employees but pay less tax through their own limited company or personal service company.

The legislation itself has been around for a while; however, starting in April 2020, the onus in the private sector will be on ‘hirer’ organisations to determine whether contractors are subject to the legislative requirements. And there will be penalties for non-compliance.

Ultimately this means additional costs. Previously unaccounted for government contributions (e.g. Income Tax, the Apprenticeship Levy, and National Insurance Contributions) will either be absorbed by contractors or factored into fees charged to the end-client.

Top six considerations

By taking a pragmatic and balanced approach, organisations can transform IR35 from check-box exercise into competitive advantage. To effectively get started, you need to consider where you are in each of the following focus areas:

1. Compliance risk

Avoiding the risk of non-compliance and any subsequent reputational and cost impact is undoubtedly the most critical consideration. Making the wrong decisions can lead to penalties and back-dated payments, and the minefield of defining whether a contract sits in or out of IR35 is unsurprisingly something a lot of people want to avoid.

Under the new legislation, the end-client is expected to ensure compliance across parties in their supply chain or assume ultimate tax liability risk. This means confidence and transparency is critical in labour sourcing. The big challenge will be balancing the need to control this risk whilst keeping costs down.

2. Cost impact

Maintaining the same level of flexible labour will probably cost more. The additional tax that was previously uncollected needs to be absorbed somewhere in the supply chain and will likely impact rates – especially for top talent who are unlikely to accept a big decrease in their take-home pay.

Getting IR35 assessments right will help to limit some of these costs (by determining who sits outside the legislation), but even that comes at an administrative price. There will also be a host of indirect costs that may prove difficult to accurately forecast. Although these costs will vary based on your individual approach, there will undoubtedly be transitional costs from additional management time, training, administration, and more. In assessing cost holistically, we also recommend that organisations take a people-first approach that also accounts for impacts to workforce culture.

IR35 Ready?

 3. Back office impact

Capability and capacity across back-office operations – including HR, procurement, finance, tax, and legal teams – will also be affected. For example, there will be inevitable impacts to payroll, onboarding, forecasting, and contract management. Given the changes, employees will need to be upskilled and existing processes may need to be reviewed and updated. To help organisations thrive in emerging regulatory climates, we’ve worked with businesses across industries to develop meaningful upskilling programs and enabling processes that prioritise employee accountability and sustain lasting capability. 

4. Flexibility

Contractors offer the benefit of flexibility, allowing organisations to easily adapt to cost and capacity challenges when needed. Most organisations won’t want to let go of these benefits, but the additional costs and potential compliance risk may limit your appetite for engaging contractors on a near full-time basis. To help organisations strike the right balance of contractors versus in-house talent, we bring expertise in designing workforce models that reinforce business strategy, manage costs, and enable organisational agility.

5. Talent retention

People are an organisation’s defining asset and retaining the best talent will help maintain performance and knowledge. It’s essential to know your critical roles, and those individuals that have the biggest impact across your business. The exodus from the public sector when IR35 came into effect highlighted the need to carefully manage and communicate with your contractor population.  

Making decisions on a case-by-case basis and having an attractive proposition will help promote retention. This presents an opportunity to not only retain, but also attract, top contractor talent in an environment where some of the major organisations are driving them away.  By designing strategies to attract and retain contractor talent through compelling experiences, organisations can optimise the value of contractors within their workforce models.

6. Quality and consistency

Maintaining consistent, quality delivery is essential. Organisations must seek ways to mitigate against any potential delays or disruption, ensuring there is no adverse impact to strategy. Although this is in part about effectively retaining top talent, it’s also about maintaining quality of service and building organisational resilience.

There’s no easy fix for IR35, yet it holds the promise of competitive advantage for organisations that approach it with an intentional strategy anchored in our core considerations.