When the Government announced changes to IR35 and off-payroll working rules for public sector workers like IT contractors, a wave of confusion rippled through online forums used by contractors and hirers alike. There are some great online resources that explain the changes, not least the one published by Stoneseed, in this post we’ll explore ways to protect your organisation from the changes to IR35 and the potential implications that they may have on your IT operation.
Firstly, a brief catch up.
IR35, also known as the Intermediaries legislation, was a response to perceived ‘tax avoidance’ by contractors operating as Personal Service Companies (PSC) but fundamentally behaving like employees – what became known as “disguised employment”. Clearly many contractors deliver services to clients that could not be construed as disguised employment and so there needed to be a test to define which talent fell into which category and guidance on who was responsible for making the call.
From April 2017 there will be a significant shift in responsibilities and liabilities. Simply put, responsibility to determine a public sector contractor’s IR35 status shifts from them to you, the end-client.
The government acknowledges that there will be “a significant initial impact” but seem to consider that this will be mainly confined to extra admin duties for public sector organisations. However, many public sector hirers are also raising fears that contractors will either increase their prices to mitigate any extra tax due or that they may shift their talents to the private sector, in which case the hiring body could face higher costs and may struggle to recruit the best talent.
According to a survey by the Recruitment and Employment Confederation (REC), few public sector hirers are in favour of the changes with almost seven out of ten HR managers (69.5%) fearing a negative impact in terms of increased wage bills, their ability to attract talented individuals and their ability to afford the experienced contractors required.
Furthermore, the Association of Chartered Certified Accountants (ACCA) warned off a “significant risk” as public sector organisations are likely to mitigate the potential risk of liability by using only large outsourcing service providers, again with cost implications for the sector.
Most commentators and observers agree that implications will reach further than extra paperwork, to what extent will depend largely upon how ready for the change organisations are. There are a number of things that you can do now to protect yourself.
1 – Start The Conversation NOW
Organisations that are dependent upon contractors should have started the dialogue with their talent already and if that’s you and you haven’t – start now. To be clear, the client needs to take the view on whether a particular service provided falls inside or outside IR35. In the interests of fairness to all, this is a judgement that is better made in a calm, measured fashion before the rules changes rather than in a rushed panic afterwards.
Having made your judgements, you will then have time to react to any decisions made by contractors on how they will operate moving forward, i.e. if they stop providing their services to the sector you will have some space to seek an alternative.
2 – Consider the Project Management as a Service market
This is probably the cleanest way to mitigate risks. Although it is true that booking contractors through agencies might shift liability to the intermediary, the IR35 decision will rest with the public sector organisation as opposed to the agency and as buyers realise this they are increasingly looking to G-Cloud for inspiration.
All public sector organisations can use the G-Cloud or the Digital Marketplace to find people, services and technology for IT projects. The Project Management as a Service (PMaaS) market offers you a complete range of Project Management services, including full Programme Management Office(PMO) providing assessments, governance, tools and people to improve your delivery capability and performance. Best of all, engaging services this way is unlikely to be perceived as “disguised employment”.
Early adopters are also benefitting from consistently high-quality IT Project Delivery, often with no net increase in the overall portfolio costs and are grateful to the IR35 changes for practically forcing upon them the opportunity to rethink their approach to IT.
3 – Be Proactive And Seek Win/Win Arrangements With Contractors To Keep Them Outside IR35
In some cases, IT contractor arrangements can be defined to ensure that they do fall outside IR35. If you currently arrange substitute talent when your contractor is ill, for instance, this would ‘fail’ the IR35 test and be deemed as “disguised employment” but shifting this responsibility to your contractor might rebalance the judgement. Again, accessing talent through a legitimate Project Management as a Service arrangement would be the clearest way forward.
It is recommended that public sector hirers and contractors work through HMRC’s IR35 criteria together to find work around solutions that work for both client and contractor but ultimately, more importantly, the tax man! An independent review may be the best way to ensure compliance.
In conclusion, time is running out and for public sector bodies doing nothing is not an option. Many IT contractors that I talk with are already considering their future outside the public sector. It is vital that you do everything that can to keep them outside IR35 or convince them of the benefits of coming “on payroll” with you (good luck with that) or you risk losing key contractors and the crucial strategic skills they offer. Many public sector organisations are skipping this step altogether by reimagining their approach to IT services and project delivery procurement, furthermore, having entered the ‘as a Service’ market many are wondering why they didn’t do it sooner.