- Blogs & Articles
IR35 changes: what to make of the upcoming Government review
- January 9, 2020
With the April deadline for changes to IR35 legislation rapidly approaching, HMRC has launched a review of the proposed changes to off-payroll working rules.
Indeed, HMRC has pledged to deliver a ‘smooth implementation’ of the revised legislation. While this can be considered a positive step, it leaves little time for companies to act after the review.
The confirmation of the review has left many observers questioning both the value and time frame of the process. Many contractors and third-party community representatives have expressed strong feelings that the review does not leave enough time for the Government to act on the findings, particularly given the changes apply to payments made on or after April 6th. This means that work completed in March will be affected by the changes, literally days following the completion of the review.
Will IR35 be delayed until 2021?
It is important to note that the announcement of the review reinforced the April 6th date several times. It stresses that the review will focus on the implementation of the changes.
Apart from a possible further tinkering of HMRC’s online assessment tool, called CEST, and the arranging of a number of roundtable discussions, there is little belief that the Government will make any fundamental modifications to the proposed changes.
Perhaps the best that can be hoped for, is a further delay until 2021, which would ‘allow the Government to include a full impact assessment of the IR35 changes already in place in the public sector’, according to Recruitment and Employment Confederation (REC). It would also ‘allow the government to regulate umbrella companies’, the REC says.
IR35 creating a talent flight risk
With a backdrop of Brexit and an ongoing skills shortage, there is a potential for the changes to make a bad situation worse. While many companies are struggling to attract the required skills for major digital transformation projects, the changes to IR35 could possibly drive off-payroll workers to seek employment abroad where the same skills are in high demand.
A recent survey carried out by the Association of Professional Staffing Companies (APSCo) reported that 79 percent of the professional recruitment firms polled believe that most of the businesses they work with are aware of the incoming changes. Meanwhile, 51 percent said the majority of their clients are actively preparing for the updated legislation (Executive Grapevine).
I’ve written previously about how companices are beginning to change their policies in light of IR35. There are a number of options available to contractors, from converting to a PAYE worker to remaining outside of IR35, and others. There is middle ground in the majority of circumstances, and the key to success is finding it.
A quick reminder:
The new rules make companies responsible for assessing whether a contractor should be considered a full-time employee in the eyes of HMRC, bringing them in-line with the public sector. Previously, it was up to the worker’s personal service company (PSC).
From April 6th, the party which pays the contractor will be required to operate PAYE or NICs as appropriate, making the hiring of contractors less attractive to medium to large businesses, which are affected by IR35.
Preparing for IR35: our recommendations
While the various recruitment industry and contractor representative bodies continue to appeal to the Government for further changes and a delay, our recommendation is to be informed, be prepared, and take action.
Despite the ongoing HMRC review, a thorough assessment of all off-payroll workers should be completed. By doing this, clients should be be prepared ahead of the deadline and contractors will feel engaged and less likely to seek work elsewhere.
With the above in mind, Hudson RPO are global leaders in recruitment process outsourcing and managed services provision. Since 1999, customers have trusted us for innovative, customised recruitment outsourcing and talent solutions. Hudson RPO have an exceptional ability to source and hire candidates with hard to find skills on behalf our clients. We also support our client with IR35 and SoW solutions. Our approach is highly consultative, professional, and, above all, honest. We may not have all the solutions to the challenging times ahead, but we would welcome the opportunity to talk to you to see how we can help.
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IR35 private sector changes: companies start to make their call
- Blogs & Articles
IR35 private sector changes: companies start to make their call
- October 9, 2019
IR35 private sector changes have HR leaders watching closely. Many businesses are adapting their strategy for a robust contingent workforce powered by managed services.
Barclays recently communicated internally that it will cease to engage contractors who provide their services via a personal services company, limited company or other intermediary. Instead, the bank will engage contractors on a PAYE basis only for new or extended contracts from 1st January 2020.
The decision has been attributed to the forthcoming changes in the way HMRC will apply rules for off-payroll working.
Barclays’ strategy follows a similar course taken by other high-profile British employers, including Lloyds, HSBC, Morgan Stanley, and GSK.
When it comes to IR35 private sector changes, those organisations have adopted a one-size fits all approach. They’ve effectively declared all contract roles ‘inside’ IR35. Some are offering the opportunity to transfer to a permanent employment contract or to work via an umbrella company — but with considerable consequences to their contractor population.
IR35 is influencing the supply and demand of skilled talent in many ways. What are the consequences to the market? Miles Stribbling, Consultant at Hudson RPO, explores the latest news from IR35, and how it may affect your business as well.
Which IR35 changes will affect the private sector?
Currently, HMRC requires contractors to self-assess their employment tax status and pay the appropriate taxes. This means that many workers have been able to engage in off-payroll working contracts when they are actually carrying out the role and being managed in the manner of an employee.
From 6th April 2020, HMRC requires that the end user of the services (client) takes on the responsibility for determining the tax status of the worker and communicate the decision to the worker and agency/intermediary. It is the expectation that both parties will work in consultation, taking ‘reasonable care’ when making assessments and resolving any disputes. It is not intended that hiring teams make blanket IR35 assessments.
Additionally, the end user (client) assumes liability for unpaid taxes if HMRC fails to collect these from the ‘fee payer’ or from other parties in the supply chain. Claims and penalties can be applied retrospectively.
What options are available to end users of contractors?
The approach taken should not be determined by the size of an organisation. However, a company with 1000+ contractors will naturally experience greater issues than those with 10.
A thorough audit of the contract workforce should be undertaken. Employers should conduct an individual assessment of the assignment, skills required, and conditions of work.
With this information, the following options are available:
- Contractor remains outside of IR35
- Contractor works via an umbrella company
- Contractor converts to PAYE
- Contractor delivers project via a Statement of Work (SoW)
- Contractor works under Deemed model
- Contractor is offered permanent employment
This presents a considerable amount of work. Understandably, large organisations will consider all options before committing money and resources to tackling the challenge.
Many organisations will have contractors falling into several different categories. The added complexity is likely to require specialist skills to get the correct contracts in place.
Employers adopting this approach will not necessarily keep all of their contractors happy. But, they will have followed the HMRC guidelines and should have remained engaged throughout the assessment process, providing clear communications.
The audit process should provide the company with a far greater understanding of their contingent workforce and offers them the opportunity to make strategic decisions using this information. It certainly lends itself to those looking to reduce their cost base via benchmarking or other activities
Those companies that have made the decision to solely offer PAYE contracts from 1st Jan 2020 have likely weighed up the costs of rolling out a large-scale assessment programme, as well as legal and procurement costs.
Furthermore, they will have considered possible reputation risks. They will have deemed the risks too great. In effect, by not starting the assessment process, they are not taking a ‘blanket’ approach to the assessments.
What is the impact of IR35 private sector changes?
Apart from companies having to prepare for legislation change and all the associated work, there is considerable unrest within the contractor community. After I recently wrote about IR35 and the digital skills shortage, I was contacted by an anonymous contractor who made their thoughts clear:
I’m usually pretty optimistic about most things, but despite having skills and experience that was until recently in very high contract demand, and serving multiple clients, I’ve already had a number of my clients terminate the arrangements; each have cited IR35 as the reason. Work has been either cancelled or moved to offshore providers. I am facing an immediate existential threat to my business (despite some careful financial planning over many years).
I have two options: take a permanent position with a very significant downsize adjustment whilst drawing down from earlier financial planning; or, move overseas. Initial enquiries suggest few employers want to take me on as a permanent member of staff (age, experience, and long-time contracts history is “off-putting”). Yes, that’s discriminatory but also my reality. Overseas interest and flexible contract opportunities are proving stronger, so I’m actively exploring that.
So, UK will likely lose my skills, experience, and taxes; and I’ll likely work for a company that probably competes against UK companies. I never wanted this.
I have been unable to follow up directly with this individual, but it is a sentiment shared widely in online contractor forums and communities.
For many people, the financial cost of working ‘inside’ IR35 on a PAYE basis is unacceptable. It is not clear to what extend the day rates of contractors will be benchmarked against permanent employees. However, it is highly unlikely that the banks will want to create a two-tier pay structure. With that in mind, contractors will have to seriously weigh up the options of a permanent salary with benefits against the uncertainty of future contracts and HMRC hard on the tails of non-compliant employers.
There is little doubt that many people will look elsewhere. In a strange twist of fate, there are reports of IR35-friendly contract opportunities in the public sector (for example, at HMRC, where the roles were originally classified inside of IR35, only to be outsourced to a third party now seeking contractors to complete the work).
Many organisations will embrace the new changes and follow the assessment process.
They will have the comfort of being compliant and correctly engaged with their total workforce.
Many contractors run their own successful businesses, providing services to clients that legitimately sit outside of IR35.
It would seem shortsighted not to retain these services, where possible.
The potential cost of replacing critical skills to deliver projects in a market that is already short on skilled talent leads me to believe that the clients will end up paying more in the long run.
There is the opportunity to find middle ground during the assessment process: it may benefit both parties to resolve matters before market conditions change.
Can the private sector see a positive outcome from IR35 changes?
There are plenty of lessons to be learned from the roll out of changes to IR35 in the public sector in 2017.
With more than 51% of hiring managers reported as having lost skilled contractors, and more than 70% reported to have struggled to retain their off-payroll workers, companies should try to avoid similar scenarios when planning for 2020.
A reliance on the UK Government’s Check Employment Status for Tax (CEST) online tool caused massive confusion, as it still does today. Blanket ‘all caught’ assessments saw a mass exodus of contractors from key projects leaving almost 80% of projects failing to meet deadlines or having to reset expectations. Large-scale outsourcing of the projects has barely managed to fill the gap. Cost savings have not materialised.
Some would argue that there are no winners, with employers paying more, contractors being paid less or losing jobs, projects failing, and HMRC making far less tax revenue than anticipated.
Even the large consultancies are struggling to the find the right talent at the right price, which is eating into their profits.
Despite this, organisations that manage the process diligently and with reasonable care, are more likely benefit from a flexible but firm approach to assessment.
Off-payroll workers provide a huge variety of services. They should be engaged appropriately.
There is middle ground in the majority of circumstances, and the key to success is finding it.
Organisations that choose not to assess will lose contractors. Organisations that fail to assess correctly or leave it until the last minute will lose contractors. Even those organisations that do everything by the book may lose contractors unless they are able to help make up the differential in pay after April of 2020.
Traditionally, one of the tax key benefits for contractors has been the ability to claim for daily travel expenses and sustenance. This made the long commutes to jobs in large cities more affordable. Perhaps one positive outcome will be the affordability of highly skilled talent on a more local basis. It should certainly help accelerate the drive to more flexible and remote working practices.
Preparing for IR35 private sector changes and Brexit
With the Brexit deadline of 31st October rapidly approaching, there is a real possibility that a further six month extension could coincide with the IR35 rule changes deadline of 6 April 2020. This is concerning.
To make matters worse (or better), lobbying groups continue to challenge HMRC on the objectives of the new legislation. The rules could still be changed, beyond what we know today. Perhaps they will be delayed or withdrawn completely. Anything could happen when it comes to IR35 private sector changes.
While Brexit commands so much media attention, it is possible that some of the consequences of a delay are being missed. Our recommendation is to be be informed, be prepared, and take action.
With the above in mind, Hudson RPO are global leaders in recruitment process outsourcing and managed services provision.
Since 1999, customers have trusted us for innovative, customised recruitment outsourcing, and talent solutions.
We offer an exceptional ability to source and hire candidates with hard-to-find skills on behalf our clients. We also support our client with IR35 and SoW solutions.
Our approach is highly consultative, professional and, above all, honest. We may not have all the solutions to the challenging times ahead, but we would welcome the opportunity to talk to you to see how we can help.
Sign up to receive the latest recruitment insights and Hudson RPO news.
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Digital skills shortage: IR35 and Brexit create the perfect storm
- Blogs & Articles
Digital skills shortage: IR35 and Brexit create the perfect storm
- September 24, 2019
In many ways, the digital skills shortage is the result of a perfect storm striking the UK.
Every day, businesses in all sectors are launching large-scale digital transformation projects. Yet, they often struggle to attract and retain the skills to deliver them.
The storm that could derail these projects is composed of several elements.
To begin, the integration of big data, cloud computing, and AI presents a complex challenge. These forces are fuelled by the development of robotic processes, cognitive recognition, and blockchain technologies.
To make matters more interesting, business leaders must also plan for the effects of IR35 and Brexit, discussed in more detail below.
These forces create a perfect storm looming over UK enterprise, and all businesses which seek to maintain competitive advantage must be mindful of its potential impact.
After all, the ability to attract investors and key talent may be at risk. Miles Stribbling, Consultant at Hudson RPO, shares his observations and insights.
IR35: a threat to contracted digital skills
If it isn’t hard enough to compete with Google, Goldman Sachs, Apple, and Amazon, HMRC have decided to play a trump card by extending Intermediaries Legislation (IR35) legislation into the private sector.
Presenting significant changes to work rules and contractor rights, IR35 comes into effect in April of 2020. These rule changes apply to companies with 250 or more employees.
IR35 is not an entirely new concept, of course, with changes to the legislation first being introduced to the public sector in 2017. A 2018 study by CIPD and IPSE revealed that more than 50% of managers lost contractors when HMRC implemented new IR35 legislation in the public sector. More than 70% of managers said they struggled to retain skilled contractors due to tax changes.
When Her Majesty’s Government first introduced IR35 in 2000, it was designed to address the problem of contractors working through personal service companies to avoid paying employment taxes. However, the door was left open for employers to take a blanket approach and refuse negotiation about terms of engagement with individual contractors.
Unsurprisingly, this was poorly received by the contractor population.
To add insult to injury, it marked the beginning of a major shift towards outsourcing significant chunks of back office support and development work to the other side of the world.
Over time, much of this work has been ‘near-shored’. The contractor workforce has recovered and provides significant value and flexibility to companies that don’t have either the budget or headcount to employ the skills it needs permanently. That is, until now.
Currently in the private sector, companies are turning to their IR35 readiness playbooks and realising that, this time, there is little place to hide. They must take their employment responsibilities seriously.
As for the contractors, they have long memories and are not going to make it easy for their beloved clients (ie employers) to get off the hook so lightly this time.
Suddenly, the offer of full-time employment, employment rights, employee benefits, employee bonuses, and job security seems a fair trade-off for self-assessment, timesheets, and uncertainty. But it won’t come cheap! The average cost increase to convert a day-rate contractor to a permanent employee is the cost of employers’ National Insurance, at 13.8% (see note 1), plus the additional costs of payroll and benefits. And that’s before you’ve even got to the negotiating table.
Highly sought digital skills come at a premium, and those who have them are in the driving seat.
The role of Brexit in the digital skills shortage
Brexit represents the crashing waves and gale force winds of this perfect storm.
Of course, nobody knows what to expect occur over the coming weeks and months.
However, many employers are concerned that the UK is becoming less attractive to candidates who offer high-demand digital skills. These are the candidates needed to deliver digital transformation projects.
Many of these highly skilled employees hail from European countries. To an extent, it’s still unclear how Brexit will affect these workers and their appetite to continue working in the UK. Many employers are concerned about whether key digital skills will be widely available post-Brexit.
In times of uncertainty, stay upbeat about innovation
While the immediate future may look bleak, there are many things to remain positive about. The Brexit situation will eventually resolve. Businesses can then make decisions based on the UK Government’s direction.
There is a huge amount of support available to organisations that are struggling to find their way during these tumultuous times. The UK remains at the bleeding edge of financial services, fintech, technology, innovation, and data management.
Dylan Thomas, deputy director of technology, entrepreneurship, and advanced manufacturing at the Department for International Trade, recently observed: “In human history, when it comes to technology, innovation almost always occurs at periods of crisis, uncertainty, and adversity.”
By providing in-demand skills and knowledge, contractors are key contributors to corporate innovation. Yet, many companies may struggle to retain contractor services, following Brexit and the imminent changes in tax law. The right managed services provision (MSP) enables a robust talent pipeline, even when uncertainty abounds.
Creating a strategy for the digital skills shortage
So, where do you go to find the required talent at an affordable price?
Perhaps we can help. Hudson RPO are global leaders in recruitment process outsourcing (RPO) and managed services.
Since 1999, customers have trusted us for innovative, customised recruitment outsourcing, and talent solutions. We offer an exceptional ability to source and hire candidates with hard-to-find skills on behalf of our clients.
Our approach is highly consultative, professional, and above all, honest. We may not have all the solutions to the challenging times ahead, but we would welcome the opportunity to talk to you, to see how we can help.
Notes
1. HMRC: National Insurance rates and categories. https://www.gov.uk/national-insurance-rates-letters. Accessed 24 September 2019.
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