IR35: A blanket approach and its implications on the market

IR35 is not new. It was introduced in March 1999 and became law via the Financial Act of 2000. It was created to uncover “disguised employees” and businesses who should be paying appropriate Tax and National Insurance contributions. IR35 became law in the public sector in April 2017, and after several annual delays, it is due to roll out to the private sector in April 2021. Small businesses with no more than 50 employees, an annual turnover of less than £10.2million, and a balance sheet less than £5.1million are exempt.

What do we mean by a blanket approach?

According to HMRC, firms should assess IR35 determination on an assignment-by-assignment basis, dependent on supervision, direction, and control. However, we have seen a percentage of large firms, particularly in financial services, ban the use of Personal Service Companies (PSCs). Termed a blanket approach, this generalisation became evident in the private sector in April 2020 when IR35 in its current form was due to be implemented, but for the unrest caused by COVID-19. Approaching a year later, this is a precursor of things to come, and we can expect a high percentage of medium and large firms to accept this blanket approach. But at what cost?

We have compiled 6 likely implications to the market:

1. Surge in contractors closing Ltd companies

Statistics confirm a 52% rise in the liquidation of Ltd companies in Q3 2020 compared to Q3 2019. COVID-19 may very well have a part to play in this reduction, but evidence shows a relatively resilient IT Contracting sector even during the pandemic.
Contractors contribute £110billion to the UK economy, and a blanket approach will further encourage the liquidation of Ltd company payment vehicles. In a best case scenario, part of this contribution will be redistributed in National Insurance and PAYE Tax.

2. Companies lose out on talent

“Is it inside or outside of IR35?” is the most important question a contractor can ask today when responding to an advertisement. If “Outside IR35” is not advertised, most likely, the position is inside. In these situations, application enquiries are often cut short by the candidate. Some assignments will inevitably fall inside IR35, but a blanket approach straight off the bat will limit the talent a firm can attract. By their very nature, some titles tend to lend to outside IR35 determination, such as the Change and Programme Management space. A firm adopting a blanket approach is likely to miss out on whole pools of high calibre specialists, unwilling to accept a firm-wide status determination.

3. Reputation

Closely linked to the point above, we have seen a stigma attached to private firms that have already adopted a blanket approach. This may be because (at the time of writing this) there is no legal obligation for private firms to adopt any determination status before April 2021. Many firms who have adopted this approach are global names and, for good or bad, are forerunners, legitimising and perhaps normalising the one size fits all model. There may be a danger that these firms carry a stigma of lethargy and an unwillingness to measure each assignment by its specific merits. This, of course, depends on whether a blanket approach becomes the norm.

It’s not all doom and gloom.

4. Opportunity knocks

Where firms adopt a blanket approach, agile firms who are not held back by bureaucracy can correctly determine positions and attract talent they would have otherwise lost out to. Now, the lesser-known firm can compete with global names to attract talent to help further their business. If due diligence is practiced when deciding, and the determination is deemed outside of IR35, there is no need to offer a higher market rate to attract candidates from larger names; the contract position is likely to be more financially lucrative regardless.

5. Umbrella Companies

At one point, being paid via an Umbrella Company was seen as only suitable for contractors whose day rate did not financially justify a Ltd. company or for those who did want the hassle of submitting paperwork. There are, however, key benefits of using an umbrella company as a payroll vehicle. The Umbrella company assumes the role of the contractor’s employer, and as such the contractor becomes entitled to statutory sick pay and maternity pay/paternity pay. Working via an Umbrella company can also prove useful when applying for a mortgage.

Disclaimer: ensure your umbrella company is a member of a regulated financial body. The last thing you want is to get caught up in a tax avoidance scheme.

6. Reduction of Salaries

Recruitment is supply and demand, the balance between the staffing requirements of a firm and the availability of applicants with the skills to meet those demands. The vast majority of employment markets suffered from the emergence of the pandemic. Even “recession-proof” industries took a hit, as evidenced by the furlough and redundancy figures published. A disturbing trend we noticed was the reduction of salaries vs. the same role 12 months prior. With more candidates on the market, some firms took the unofficial approach to lower salaries on the assumption that there would be more people willing to work for less. Going forward, this is a real possibility as we can expect many long-time contractors to now seek permanent roles. We have already witnessed a steep rise in PSC closures.

 

There is every likelihood that we can see a blanket approach as the norm moving forward, even though there are tools to help companies make a correct determination. The government created the CEST (Check Employment Status for Tax) tool for this precise reason. There are also external tools from several IR35 specialist firms that can assist in determination. It would seem this blanket approach is motivated by risk, the risk of falling foul with HMRC, and in many cases, being liable for outstanding tax owed during the assignment. But, firms must weigh the risk of missing out on specialist staffing talent to a competitor because they decide to do their due diligence and assess an assignment on the merits of supervision, direction, and control as advised by HMRC.

If you need any help or advice regarding IR35 and the hiring market feel free to reach out ob@bestmansolutions.com