IR35 is on everyone's minds, however for a lot of us the legislation can be confusing, which is why we sat down with our Director, Catherine Kellaway, who managed public sector clients through the changes in 2017. Read on to find out what options there are out there and what changes we all need to make...
When did we first hear about IR35?
IR35 is not a new legislation, though it might be the first time a lot of people have heard about it. At Goodman Masson, we started reviewing the legislation in detail mid-way through 2016, when the pending public sector update was announced, so when the public sector IR35 reform came into effect in April 2017, we were able to help both our clients and contractors navigate the changes.
Which sectors were originally affected?
Most of the public sector was affected. The definition of public sector, for the updated IR35 reform in 2017, was those organisations listed under the Freedom of Information Act. So, this included NHS bodies, government organisations (including companies like the BBC and TfL) and educational institutions.
How have clients dealt with IR35 so far?
Every client and every job role is different and so the ways clients have dealt with IR35 has also been different. There’s been some mistakes made but luckily for those dealing with IR35 now, there’s also been a lot of lessons learnt. For instance, the NHS initially made a blanket decision on how to deal with all their finance contactors, however they were publicly criticised for doing so and later retracted this decision; some clients tried to hire FTCs over interims but found they were wasting time in their recruitment process, as they were unable to secure the right calibre of person for specialist roles; Some clients increased their budgets by compensating for the cost of the NI, meaning there was a reduced impact on contractors changing from LTD to PAYE; and a large number of clients lost contractors as they were able to move to the private sector. Across the contractors we worked with, 19% of them decided to move into the private sector, where they could choose to continue working as a PSC. Come the 6th April, apart from small companies (t/o <£10.2m/b/s £5.1m /<50 employees – 2 or more criteria), all companies will be operating under the same legislation.
What’s been the biggest change for Goodman Masson since the public sector IR35 reforms?
By far the biggest change has been the launch of our consultancy arm. Following the public sector IR35 reform, in certain markets, we saw huge demand from our clients to engage with us on a consultancy basis over contingent recruitment.
We have invested heavily in establishing a specialist IR35 team to help guide our clients and candidates, which includes legal advice from specialist lawyers and hired a consultancy project partner (previously the CEO of a large Consultancy business). This investment along with our network of market specialists has allowed us to navigate clients through new engagement models, whilst ensuring they are not put at IR35 risk, and able to engage the best talent to delivery projects on time and in budget.
Is there anything we could learn from the public sector IR35 reform?
It’s incredibly important to be knowledgeable about IR35 and what it means for your business, as it will save vital time within the recruitment process and understanding the legislation will help your organisations ability to attract the top interim talent.
Whether a role is deemed inside or outside of IR35 will make a huge different to a contractors take-home pay and so being able to be clear on this from the start of the recruitment process is critical in order to ensure recruiters can find people who fit into your budget. If a role is truly outside IR35 it will be very attractive to contractors and where possible, line managers should think about how they can re-design roles to be truly outside.
Another big lesson from the public sector is that the market will adjust. In some talent pools, it is very hard for a role to be outside IR35 and this will be the case for every client hiring from that talent pool. As such, candidates in this space will be more likely to have to accept the market rate (even if that is a reduction on what they took home before the updated IR35 legislation).
Finally, when the public sector IR35 changes came in, there was an increase in umbrella companies offering dodgy loan schemes. Such schemes would put everyone in the supply chain at risk. As people attempt to capitalize on the market disruption, it is critical that organizations work with trusted suppliers, who have invested in up-to-date legal advice and have rigorous compliance processes which they adhere to.
Who do you think will be most affected this time?
Those organisations who take ‘blanket approaches’ will be deemed less attractive by contractors. We have already seen this, with increased numbers of financial services contractors contacting our commerce and industry teams to find out if they can secure them roles with commercial companies. A number of large financial services institutions have already communicated to the market that they will either not hire contractors or will only hire PAYE contractors. In stark comparison to this approach, lots of commercial companies are communicating that they are proudly trying to work with their contractors to ensure they are truly outside IR35.
Another pool of people who will be affected are line managers, who are forced to spend time trying to hire someone on an FTC when the skillset they are looking to bring in is niche and competitors have worked out a way to hire people with this skillset, either outside of scope or on a statement of work engagement model. These managers may find key projects and deliverables are missed because of such an approach.
Finally, those most obviously affected by the IR35 reforms, are contractors who have previously been paying lower rates of tax but will now pay the same/similar levels of tax to permanent employees.
How are clients preparing for this change?
As mentioned, there is a huge variation in how our clients are preparing, some have whole project teams ready and working on it, some have hired contractors (!) to manage the change, and others still don’t know what IR35 is or don’t have the capacity internally to deal with any issues. For the latter pool of clients, we have seen an influx engaging Goodman Masson’s consultancy arm to manage all or various phases of their IR35 strategy.
As Goodman Masson’s lawyers stressed at our recent IR35 events, the IR35 legislation is complex and clients have lots of steps to take in managing the change. To name just a few keys steps for clients;
- understanding how many contractors you have that are affected by the legislation
- understanding the supply chain
- analysing and understanding the impact on your contractors
- working out your options for retaining your contractors
- finalising your internal processes to ensure your IR35 decisions will stand up to any investigations carried out by HMRC
At each stage, there are numerous considerations for clients to make and, as mentioned before, companies really need to ensure they have someone/a team who can guide them through the reform or engage in external support to manage this.
What do you think will be the long-term impact of this legislation?
I think there will be winners, in hiring managers and clients who work hard to understand the legislation and do everything they can to still be able to attract and hire the best contractors, and ‘losers’, in those who do not work as hard to ensure this.
I also believe there will be market rate adjustments; certain talent pools will remain in high demand and contractors in those talent pools will be able to charge higher rates and demand alternative engagement models, whilst other candidate pools will have to accept a reduced amount of take-home pay.
Overall, it’s important to remember that the contracting profession has survived lots of legislative change over the years; many predicted the initial IR35 legislation to be the demise of it. This didn’t happen and neither has this been the case in the public sector. So, despite the IR35 reforms, whether it’s for sick leave, project support, interim cover, or to bring in someone with a specialist skillset, companies will still need to hire contractors.