Why it is crucial that end clients get IR35 right in 2021
The IR35 reform has dominated contractor news since the public sector rollout in April 2017. It’s generally accepted that this reform did not go particularly well (as highlighted multiple times in the recent Lord’s report on the subject) and, judging from the run-up to the original April 2020 implementation date, the private sector reform is in danger of going the same way.
Many large corporates in the financial and pharma sectors pre-empted the changes in legislation and liability by taking ‘risk-averse’ measures late last year. It began with HSBC announcing a cull in limited company contractors, which was quickly followed by Morgan Stanley, and M&G Investments. Later on, Barclays and Lloyds took the softer but still contractor-averse stance of pushing all limited company contractors to PAYE. GSK and other pharma agencies also went the same way just before Christmas 2019.
Off the back of all these knee-jerk reactions, sites like offpayroll.org.uk sprung up to help the self-employed track who was taking a negative approach to the reforms, and who was supporting contractors with fair employment status assessments. This time around, contractors will understand the legislation a lot better, and are well-prepared for what may come as a result of the impeding reform.
This is why it’s absolutely paramount that you, as a recruiter or end client, start preparing way in advance; take the time to put the correct processes in place now and come April 2021, you’ll have your pick of contractor talent. We take a look back at the mistakes made by end clients on the run-up to the original 2020 reform deadline so you can avoid doing the same.
Why did so many banks take the risk-averse route with IR35?
The biggest IR35 threat to medium-large sized businesses and, incidentally, the biggest cause of blanketing is that end-clients will become liable for their contractors’ employment status as part of the reform.
It’s a sticky situation for many, and it’s often unclear on what the best way to proceed is. The immediate kneejerk reaction by many large corporates – in particular, HSBC, Barclays, Lloyds, Morgan Stanley, and M&G Investments – was to push all contractors to PAYE or stop engaging them completely.
While this is certainly the most direct and risk-averse route to removing any IR35 concerns, it’s a myopic business move that eradicates specialists and flexible workers in one fell swoop, both of which are intrinsic to most modern business models and especially so post-COVID.
The debt transfer provisions aspect of the reform is also something of a worry for businesses. Should you, as the fee-payer, not pay the correct NI and income tax deductions after a contractor is caught by the legislation, then this debt could fall to another business in the supply chain to shoulder – whether the status determination was their responsibility or not.
Why culling contractors isn’t a risk-free way to deal with IR35
The likes of Barclays, Lloyds, HSBC, Morgan Stanley, and M&G Investments who announced a limited company contractor cull did nothing more than shoot themselves in the foot. By taking such a stance, they ultimately directed highly skilled contractors to competitors who were – and still are – being proactive for the IR35 reform.
The medium-large companies that are willing to work with contractors to legitimately preserve their self-employed status will enjoy the cream of the crop with little competition, resulting in coups that could prove business-defining for certain underdogs in the financial and pharma world.
“Rumours of a contractor mass-exodus had been circulating even before HSBC officially announced its IR35 position,” Vessey says. “Experienced, talented contractors had, and will have again, little problem taking their services elsewhere. Many of these contractors will have worked with the banks for several years, taking with them in-depth technical knowledge of programmes and processes.
Not only will this be difficult to replace but it could prove a threat to the likes of Lloyds, Barclays, and HSBC as a business – particularly if those same contractors are approached by a similar business willing to apply the off-payroll rules correctly.”
“If clients decide to take a shortcut and point contractors in the direction of a contracted-out services provider, then they will have to be certain that they are happy to relinquish control of project work to that third party and that the contingent workers are not personally providing their services,” he continues. “If not, they will find they still need to consider the off-payroll rules anyway.”
What can businesses do to prepare for IR35 without blanketing?
Charlie Cox, Commercial Director of international staffing company Sthree, is vehement on the subject of blanket employment status determinations and is advocating against another contractor cull repeat of last year.
“If you or your organisation are thinking about determining that all of the contractors who supply services through a limited company to your business will fall within the Off-Payroll Working rules (you consider them all to be Inside IR35), you absolutely should not do this,” he says. “Not only is it illegal, but it will also not likely be an accurate reflection on the actual status that should be applied and is also not treating each assignment individually, as you should do in line with the legislation, taking reasonable care.”
There are many things that businesses can do to proactively prepare for the IR35 reform, including identifying the number of workers who currently operate via a PSC or limited company, determining if IR35 applies to any contracts and working practices that extend past April 2020, and assessing arrangements involving complex labour supply chains.
Talking to contractors about where they feel they sit in accordance with IR35 is another action that shouldn’t be overlooked; developing a communications plan is crucial for making sure everyone involved understands the legislation and its implications.
There are also IR35 products – like our award-winning IR35 Protect package – that include comprehensive off-payroll insurance cover that flexes for the shift in liability come April 2021.
Our particular package comes with a recruiter- and end client-friendly employment status review tool to help you manage fair, compliant assessments across your contractors, and we offer tribunal defence, IR35 process consultancy, and HR training from our Head of Tax Andy Vessey or our IR35 Compliance Manager Matt Tyler.
Get ready for the IR35 reform with Kingsbridge
“It’s now of utmost importance that recruiters and end clients in particular set preparations for the reform in motion, take the time to understand the risks associated by not having the correct processes in place, and educate themselves how to assess contractors fairly,” warns Head of Tax Andy Vessey.
“Don’t shoot yourselves in the foot with gross risk-aversion – UK companies will absolutely need to utilise flexible workforces now more than ever to get the economy engines firing again in a post-pandemic landscape.”
To find out more about IR35 Protect, click here to download our guide. For more information on how Kingsbridge can assist your business in preparing for off-payroll 2021, or for a demo of our award-winning status determination tool, please email IR35@kingsbridge.co.uk, or give the team a call on 01242 808740.