Dan Grim: Is IR35 the death of contractors?

Despite the Government’s IR35 reforms being just a few weeks away, a considerable proportion of soon-to-be affected businesses continue to be both concerned and confused by the upcoming changes. Many organisations still don’t even know that the changes are coming (71 per cent according to recent research), whilst those that do are unsure of how it will affect their structure and staff.

IR35 will, on April 6th, see medium and large businesses forced to set the tax status of certain contractors and freelancers – where previously this tax status was set by these contractors and freelancers themselves.

As a result, contractors will be forced to pay the same tax and National Insurance contributions as full-time employees, but without any of the benefits – including holiday, sick pay or parental leave. In turn, big business fears an exodus of talented contractors – either abroad, or to British small and medium-sized enterprises (SMEs), who will be unaffected by the new reforms. Indeed, further recent research suggests over half of contractors will quit their role when the reforms kick in.

Whilst there is no doubt that IR35 represents one of, if not the, most dramatic changes to contractual employment in the UK, there are solutions around IR35. The reality is that companies who have employed contractors can continue to do so in the right and proper manner.

It is vitally important businesses are fully prepared for, and communicating around, the changes. This includes firms fully getting to grips with how the legislation will impact their business, and effectively communicating with contractors on how the changes will impact their role (many of whom may be unsure as to whether they fall inside or outside of IR35).

In late February 2020 the new chancellor, Rishi Sunak, said that HMRC will not be ‘heavy handed’ in the first year of IR35, granting firms a period of adjustment over the next twelve months. However, in the longer term, ignorance will be no defence for falling on the wrong side of the law – so with time ticking, firms need to be making their contingency plans today, not tomorrow.

If a firm is one of the many thousands employing any of the 230,000 contractors that will be affected, contingency plans could realistically take two forms: either ensuring that those contractors who are set to fall inside IR35 continue to be employed on a contractual basis in a legal way or replacing these contractors will permanent staff.

Whilst hiring permanent staff to replace those lost contractors may seem like the obvious solution, this approach runs the risk of talented contractors being replaced by less equipped or skilled permanent staff. There is also the consideration of recruitment costs, onboarding, training and associated on-costs (such as pensions).

Furthermore, as any business can testify, employing permanent staff can be an arduous process – the hiring process is often one or two months, followed by a long notice period – meaning from the start of the search to the position being filled can take the best part of half a year. Again, it is therefore vital that businesses are planning for these eventualities now rather than later.

Ensuring current contractors have the ability to continue working on the right side of the law is equally feasible, as long as such a scenario is fully planned for in good time. The key here will be to continue to engage contractors on a project, rather than retained, basis – with the requirement being that there are a fixed project end date and deliverables written into a Statement of Work.

Undertaking a managed project-based approach through a third-party digital agency will ensure these contractors will fall outside of the new working criteria. This process means the best quality contractors can feasibly maintain their status quo and continue working outside of IR35. A key aspect is to ensure contractors end their direct relationship with the client and work through an intermediary.

Whilst there is no denying that IR35 will have a notable impact on the business landscape, the upcoming legislation needn’t mean the death of the UK’s big business freelancers. Those companies that plan accordingly in good time, and are able to implement the required measures to ensure current contractors can be retained on a per-project basis, will see both the financial and logistical burden of IR35 reduced as much as possible.