IR35 LATEST: The End of Contract Recruitment?

Chancellor of the Exchequer Philip Hammond announced his Budget to Parliament on Monday 29th October. The largest revenue generating move within it, worth an estimated £1bn+, involves changes to tax rules for contractors:

“The off payroll working rules – known as IR35 – are designed to ensure fairness so that individuals working side by side in a similar role for the same employer pay the same employment taxes.

Last year, we changed the way these rules are enforced in the Public Sector. But widespread non-compliance also exists in the private sector. So following our consultation, we will now apply the same changes to private sector organisations as well”.

The new rule won’t apply until 2020 and 1.5 million small businesses won’t be affected. Given there are 5.7 million business in the UK, this means close to 75% of businesses will.

What does this mean?

Any decent contract recruiter will have IR35 tattooed on their knuckles. And by that I mean, possess a working understanding of it. It’s just as important for perm Recruiters to be aware of the implications as well.

In a nutshell: the move’s designed to guard against “disguised employees”: self-employed contractors working through an intermediary (typically their own LTD company); people who would otherwise be considered employees of the company given the nature of their work.

The idea’s that employers and individuals would be deterred from using contractors if they’re doing so to reduce their tax contributions.

As a result, contractors will essentially have to pay higher taxes than they currently do.

While receiving none of the benefits of permanent employment. Understandably, the news hasn’t gone down well with freelancers. Which is putting it mildly.

Andy Chamberlain, Deputy Director of Policy for The Association of Independent Professionals and the Self-Employed (IPSE), states the IR35 changes will “heap cost and burden onto business, and restrict the UK’s greatest competitive advantage – it’s free labour market”.

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How will this affect recruitment?

It’s uncertain, given that it was only announced recently and there’s almost two years before it comes into force.

When similar changes were rolled out in the public sector last year, ContractorCalculator reported “76% of public sector departments lost highly skilled contractors” and “71% of projects were delayed or cancelled”.

70% of recruiters said contract placements in the public sector dropped, according to The Association of Professional Staffing Companies (APSCo). That’s not necessarily to suggest the same could happen in the private sector, more that we know what to expect. Which should make the risks easier to mitigate.

In theory, contractors would need to increase their rates by 25%+ to offset their loss of earnings.

This would mean average deal values could shoot up, if businesses were willing to pay more for a freelancer. 

Contractors might stick to what the government recognises as “smaller businesses”, although options would be limited. Or they could just switch to perm.

Which means your opposite number in the office gets to clean up.

IR35 decisions are made on a case by case basis. This prevents companies from simply enforcing the same tax on everyone – contractors and employees equally.

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What you need to do

Your homework, pretty much. One criticism levelled at IR35 is that it’s supremely complicated. As a Consultant, you need to know who’s liable for what.

Adrien Herbert, Director and Interim Professional at Blackline Legal, has written an article outlining the risks faced by agencies placing contractors:

“HMRC will find a recruitment consultancy liable if the agreement it strikes with a consultancy business doesn’t accurately reflect the upstream agreement signed with the client business”

Which basically means an increased responsibility toward the accuracy of contracts. Because if one of your runners is judged to be working in a way that violates tax law, it could be your neck on the line.

Ask your clients how they plan to adapt to these changes. Your business will need to adapt accordingly.

Talk to your contractors and point them towards HMRC’s Check Employment Status for Tax (CEST) tool, although make it clear this isn’t mandatory and has been criticised for it’s inaccuracy.

Seb Maley, CEO at Qdos Contractor, put together The key steps to managing IR35 reform in the private sector:

“Last December, the temporary recruitment market was judged to be worth £28.2bn, compared to the permanent recruitment market which was valued at £4bn … companies whose performance rests on their ability to place contractors must do everything in their power to make well-informed and individual IR35 decisions”

If that valuation’s true, the contract market’s soaring. Which goes to show there’s also a lot at stake in a lucrative market.

If you’re lucky enough to be along for the ride, our Productivity Hacks: Contract Consultant Special is for you. And if you’re interested in swapping desks, have a look at the Top Contract Agencies to Propel Your Career.

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Is IR35 the end then?

Nope.

IR35’s the GDPR of its day, in that it’s extremely complicated and people keep talking about it.

All of these links are well worth bookmarking and you’ll probably have to read them sooner or later:

– IR35: working through an intermediary – the Government’s business tax resource page

– Increasing compliance with the off-payroll working rules in the private sector – bullet points of the main changes, from the Treasury

– Even if IR35 does change today, contracting will still cope – these are all the things you’ll want to talk to your clients about

– IR35 guides and help: Do the rules apply to you? – ContractorCalculator’s got the biggest collection of IR35 resource I’ve seen

If changes in the public sector last year are any indicator, it’s fair to assume the private sector’s going to feel the effects as well.

There’ll be more detail coming to light next Summer. In the meantime, Hunted will have the latest on what you need to do to stay ahead of the upcoming changes to IR35.