April 2020 is approaching fast - and with it the IR35 reforms for the 5.5 million businesses in the UK. These changes to IR35 were rolled out to the public sector in 2017 and we have been analysing the effects of the reforms on the public sector in order to forewarn and forearm the private sector.
What is evident is that businesses must not only prepare for the new IR35 rules, they must prepare for the consequences of them too.
How will the new IR35 rules impact business?
1) Loss of current contractors
76% of projects and departments in the public sector lost contractors due to the IR35 reforms.
This exodus wasn’t simply an issue of pay. If contractors stay and are deemed inside IR35, not only must they pay all the tax that a permanent employee pays, they are also not entitled to any of the benefits. Additionally, if contractors agree to become permanent employees, this could lead to a retrospective tax review of the contractor’s IR35 status. Taken together, staying put post IR35 reform is not an attractive option for them.
2) Project Delays
71% of projects in the public sector were delayed because of contractors leaving as a direct result of the reforms.
Organisations will do well to be prepared for the consequences of any delays. Build in more contingency and plan for projects to take longer. In addition, ensure this has been communicated to the project sponsor and be aware of any dependencies you may have on projects who use contractors.
3) Increased Costs
Studies following the impact on the public sector IR35 changes have shown a significant increase in costs with 42% of contractors raising their rates to balance the cost of being caught within IR35 rules.
Plan an IR35 line into your budget for all current and future projects and expect resource costs to increase between 10 – 20 % regardless of the way your business decides to address the IR35 reforms.
4) Scarcity of Skilled Workers
94% of contractors stated in a recent survey that they would avoid contracts that place them 'inside IR35’ with 23% stating that they would stop contract work altogether.
In 2017 contractors were able to switch to the private sector, but now these skilled workers must do one of three things: find contracts that fall outside of the IR35 reforms, follow the new rules or take up a permanent position. This disruption, whilst contractors decide which path to take will lead to problems and delays in engaging specialised resource.
One positive note is contractors entering the permanent marketplace. Be aware however, that permanent hiring agreements will need to be reached internally and significant increases in permanent salary bands will also need to be approved.
5) Increased Administrative burden
There is so much to say on this important issue that we will go into more detail for you in another Insight. Broadly speaking however, businesses will now need to:
• Identify contractors supplying their labour and complete due diligence on the supply chain
• Train staff to make determinations on IR35
• Identify and manage adjustments in working practices and systems change etc
• Budget and plan for the impacts above
• Manage the IR35 status determinations, statements, communications and disputes
What options are there for my business to comply with the IR35 Changes?
Many public sector organisations introduced blanket policies to negate the need to allocate time, money and resources to the new rules. However this goes against the legislation which requires decisions to be made on a case-by-case basis. It was also short-sighted for organisations that rely on a flexible workforce.
In terms of your approaches for dealing with the IR35 changes, there are three key options most organisations are considering:
• Take on the extra cost and administrative responsibilities imposed by the IR35 changes
• Where possible make more use of outsourcing
• Engage a consultancy to provide interim specialists under a consultancy agreement
Which option you pursue will depend on internal policies and your ability to engage third parties. What is clear, however, is that if the private sector are to avoid the issues experienced in the public sector, careful planning is needed and the time to act is now.
If you would like to discuss how our contractor replacement solution can ensure you continue to deliver your cyber security programs after the IR35 reforms, please get in touch.