IR35 Reforms Incoming: What Can We Expect?
Reforms to the off-payroll working rules (IR35) have been the subject of many conversations in the staffing and service industry over the last few years. Originally intended to go live in 2020, the legislation that categorises the tax status of individuals working through a personal service company (PSC) is set to become active law in April 2021.
The new target date is the third such attempt to bring IR35 in the private sector into reality. So, what can businesses expect as we approach the new deadline?
A Changing Market
Firms that have yet to make the necessary changes to incorporate IR35 into their business model face a different landscape from those that have already adapted.
The market for Pay As You Earn (PAYE) engagements has historically been secondary to the PSC option in the private sector. The PSC was often the model of choice when workers could determine their own status, so companies became experienced in using it. However, when the IR35 reforms were unexpectedly postponed so close to last year’s launch date, some firms chose to adapt regardless, which caused a split in the contingent market for most of 2020.
Many firms will probably have adjusted their processes by April. Yet those that have delayed reforms until the last minute may have reduced the flight risk for talent and inadvertently circumvented a complex marketplace beset by an array of disruptions. Those firms that do indeed adopt the reforms in April 2021 will experience a considerably more mature PAYE market than their competitors did a year ago.
Challenges and Opportunities
The IR35-related changes that companies need to make to their business operations are well documented. However, less attention is given to how those in the rest of the supply chain will be affected. Indeed, organisations will not only see internal changes, but their external partners are also likely to be repositioned.
While the IR35 changes have presented significant challenges to the supply chain, there have also been opportunities. One is the contest for determinations. Check Employment Status for Tax (CEST) is a tool designed by HMRC to guide businesses through the complexities of identifying who should fall within the scope of IR35. Some companies have wasted no time in presenting this added-value service.
Large organisations with longstanding legal partners will undoubtedly seek advice within their own infrastructure. However, the number of companies offering determinations for a nominal fee is growing. Deloitte has identified “developing a robust methodology for making status assessment” as being a “key challenge that organisations have faced in their preparations to date”. It makes sense, therefore, for smaller organisations to outsource this service.
Consultancies, too, are adapting their organisational structure to the new parameters under which private sector firms engage their services. Those that previously adopted the “associate model” – hiring independent contractors who are presented to clients as a consultant from their company – as opposed to deploying their own full-time staff, will need to rebalance the ratio of associates versus employees. If they fail to do this, it could seriously damage competitiveness , and they risk being overlooked by clients looking for a more risk-averse engagement.
Consultancy.uk suggests that demand from partner organisations to use employees will only increase, and that so-called “challenger consultancies” already have a wide talent pool willing to join on a full-time basis. These consultancies previously found that consultants would either seek employment with the larger brands or prefer to remain contracting. Indeed, challenger consultancies were growing at a faster rate than the larger firms (18% versus 7% in 2018) despite the “main challenge for many of these smaller firms [being] hiring sufficient consultants to meet demand”. If IR35 continues to shift the mindset of candidates in the marketplace, we could see the consultancy sector undergo a serious transformation, with increased competition from challenger firms being able to acquire experienced talent on a full-time basis.
A Move to Offshore?
Companies will need to undertake a major strategic rethink as they prepare for IR35. The reforms are likely to increase the cost of taking on contractors, at least in the short term, regardless of where statutory costs are attributed in the supply chain.
It is possible that IR35 could encourage more firms to seek offshore contractors. With IR35 bringing pricing structure into line with countries such as Italy and the US – who have employer/Social Security costs built into the chain – could contractors in low-cost countries such as the Philippines, India or Poland present cost-savings that are hard to resist?
Perhaps. But securing contractors offshore has its own set of challenges, and the location strategy will be moot if companies choose to bring contingent workers into the full-time fold. Back in 2019, as firms prepared for IR35, the talent market saw permanent workforce hiring “rising for the first time in a year”. Should those making the changes in 2021 go in the same direction, then the contractor market could see a significant shift across the board.
An Uncertain Future
As the deadline for IR35 fast approaches, there will inevitably be twists and turns to come. 2020 threw its fair share of curveballs , so we cannot rule anything out. Could the political climate mean an April roll out is too disruptive unless socio-economic factors stabilise? On the flip side, could the IR35 help balance the books at a time when assets have been consumed by government stimulus packages?
And let’s not forget that the IR35 legislation has yet to be finalised. Sources report the CEST could be overhauled, so much could change between now and April 2021. Whatever happens, companies across the UK need to consider the implications of IR35 among all the other challenges they face when creating a strategy for the future.
Not adopted the changes yet? We've been working with our clients to prepare for IR35 and have collated all of the most useful resources for businesses in the run up to April 2021.