IR35 and the private sector: Is tech hiring about to get harder?
From April 2020, the government’s revised off-payroll working legislation (IR35) will apply to the private sector. By making the fee payer responsible for determining a worker’s employment status, these new rules represent a significant shift in liability from contractor to hirer. Already, a succession of big-name enterprises have phased out limited company contractors in favour of permanent hires. So should your business take a similar approach?
Here’s a closer look at what’s changed, and at what this means for your wider hiring strategy.
IR35: the new private sector rules
IR35 is HMRC’s answer to the perceived problem of “disguised employment”: arrangements akin to employment where workers bill for their services through an intermediary (usually their own personal services company) purely as a means of reducing their tax and NI liability. If the arrangement falls within IR35, HMRC will tax it along the same lines as a standard employment relationship.
In 2017, the IR35 rules covering the public sector were changed to shift two key responsibilities from the worker to the hirer. From 6 April 2020, similar rules will apply to the private sector.
Here are the two main changes:
- Previously, contractors were required to determine and declare their own IR35 status. From April, this status determination becomes the responsibility of the organisation using the worker’s service (the ‘end user’).
- If the arrangement falls within IR35, the organisation responsible for paying for the worker’s service (the ‘fee payer’) is responsible for calculating and deducting tax and NI through PAYE. The end user and fee payer will usually be the same party; one notable exception being agency hires where the agency is responsible for paying the worker’s fees.
Does the rule change apply to my company?
The new rules apply to medium and large employers, defined as follows:
Unincorporated bodies with a turnover of more than £10.2m.
Incorporated bodies (companies, LLPs, unregistered or overseas companies) where two of the following apply:
- Annual turnover of more than £10.2m
- Balance sheet total of more than £5.1m
- More than 50 employees.
Where a parent company meets the threshold, the new rules will also apply to all subsidiaries.
Your recruitment model: questions to ask
If you currently engage meaningful numbers of contractors, now is the time to review both your existing arrangements and your wider hiring practices.
For some businesses, the nuclear approach may seem tempting: to bring all existing independent contractor arrangements to an end and offer to re-engage those contractors as permanent or fixed-term employees. This means automatically taking a hit in terms of employers’ NI, but it side-steps the need to evaluate the IR35 status of each and every contractor, and removes the risk of sleepwalking into non-compliance.
But does calling time on contractors actually make sense from a business perspective? Especially when it comes to bringing tech talent on board, the contract model is often a natural fit: it provides vital support for project delivery, it equips businesses to deal with fluctuations in demand, and helps to plug skills gaps - often at short notice. Rather than jettisoning the contract model completely, organisations should ask the following questions:
- Which roles is there a business case for bringing in-house?
- When, and under what circumstances is there a business case for hiring independent contractors?
- For those contractors, how do we construct the arrangement to avoid IR35 liability?
Permanent recruitment: time to take stock
GlaxoSmithKline, IBM, Lloyds Bank, HSBC and Barclays have all opted to phase out the use of contractors operating through personal service companies, mostly offering to re-engage existing contractors on PAYE terms.
The bigger the organisation, the greater the likelihood of being able to take this type of blanket approach. As well as being able to absorb the cost of adding large numbers of staff to payroll, the typical multinational tends to have considerable leverage in the recruitment market - so, isolated gripes aside, persuading contractors to stay is less likely to be an issue.
But let’s say you are head of HR at a software house with 50+ permanent staff already, and a similar number of PSC contractors. Compared to a bluechip, the financial implications of adding large numbers of extra people to payroll at a stroke are likely to be much more significant. As an alternative, this may be a prime opportunity to take a wider view of your staffing strategy, review your operating model, to assess what skills you need to drive the business forward and to cut back on overlapping roles.
Will it be harder to recruit and retain after April?
In a word, probably: especially if you are forcing current workers and new hires to accept a status determination they are unhappy with.
Switching contractors to PAYE can reduce their income by as much as 25%. For one thing, salaries are taxed at a higher percentage rate than dividend payments through a PSC. They will also likely find themselves out of pocket for many of the expenses they were previously claiming.
On top of the financial benefits of operating through a PSC, many workers also appreciate the freedom and flexibility that the model offers. Try to force them onto payroll and they may be inclined to walk away. For instance, one survey suggests that 59% of contractors would consider working for someone else if they found themselves caught within IR35 in their current role.
Particularly in specialist, in-demand areas such as data science and AI, firms are going to have to balance HMRC compliance, the needs of the business and the commercial realities of the recruitment market.
For example, let’s say you have assessed your star data engineer’s existing contract as falling within IR35 and they are uncomfortable about the idea of being added to your firm’s payroll. If money is the main bugbear, is there scope for negotiating a higher rate? Alternatively, could you formulate the new, salaried role so it better aligns with this contractor’s career goals? Good communication is essential here: only when you understand a contractor’s specific concerns about their employment status can you start to address them.
Accessing the right help
It’s important to remember that IR35 was never meant to eliminate bona fide contract arrangements. It is possible to continue to engage contractors through intermediaries and keep the arrangement outside of IR35, provided that you keep the contractor effectively at arm’s length from your organisation, allow that contractor control over their working processes, ideally provide a right of substitution and do not insist on exclusivity.
Do you need help in formulating contractor roles to stay outside of the scope of IR35? Need a tried-and-tested way to access permanent/temporary staff in the fields of AI and data science? Speak to Millennium Consulting today.