IR35: Overcoming your IT contracting challenges

Wednesday, April 07, 2021 - Audacia

By the time you read this, private sector IR35 reforms will have come into force, creating a significant headache for any business reliant on private sector contractors.

What is the impact of the change?

From April 6th 2021, every medium or large private sector business is expected to review their use of contractors and how their roles are classified under the IR35 legislation. Essentially, your organisation must decide whether each role falls ‘inside’ or ‘outside’ IR35 – a task that was previously left to the contractor themselves.

If the role is determined to fall inside IR35, your business is expected to deduct income tax and National Insurance contributions (NIC) from the contractor’s payments.

Learning from IR35 in the public sector

Using ‘personal service companies’ (PSC), businesses have been able to reduce their wage bills - no Class 1 employer contributions was a useful way for an organisation to control their costs. And it wasn’t just the private sector benefiting from this arrangement.

In 2017, public sector bodies began the process of classifying contractor roles as being inside or outside IR35. Some jobs were made permanent with staff being taken onto the payroll. Other contractors were forced to join umbrella organisations who assumed responsibility for deducting PAYE and NICs.

The process was long and arduous and the tax loophole was eventually closed - but there were some unintended consequences too. 76% of public sector departments lost highly skilled contractors – and 38% could not be replaced. 24% of projects lost at least half of their contractor workforce as individuals left for the private sector – or even moved abroad.

The public sector experience shows what private companies should expect this April.

Why has IR35 become such a headache?

IR35 will create problems for any organisation reliant on long-term contractors for headcount. Obviously, there’s an increase in cost because you need to pay Class 1 NICs. And as contractors find more of their salary disappearing under PAYE, you are likely to face demands for rate/salary increases to cover the shortfall.

The reclassification of roles is likely to be highly contentious. Public sector organisations like the NHS faced a lot of time-consuming, costly disputes and push-back from contractors who felt that their roles had been classified incorrectly.

It is extremely likely that at least some of your most valued contractors will leave. In fact, 52.5% of contractors plan to leave immediately – and another 4% plan to emigrate. Another 19% plan to stay on short term while they evaluate their options.

It is also worth noting that 79% of IT projects in the public sector were delayed after IR35 came into force – and it is not unlikely that similar problems may affect your projects. Especially as nearly 60% of the contracting community could virtually disappear overnight.

Eager to remain compliant with HMRC regulations, many businesses have taken a hardline - no contractor policy. IBM and BP have both issued ultimatums to their contractors - join the payroll, join an umbrella organisation or leave. This was followed by a complete ban on using PSCs.

What your business needs to do now

Given the complexity of reclassifying every role it makes sense to take drastic action – perhaps getting rid of contractors altogether. Partnering with a software development house like Audacia allows you to avoid the IR35 risks – and gain a lot more besides.

Scaling your resource pool

Instead of scaling or augmenting your engineering team with disparate contractors, Audacia can provide flexible teams that meet your needs – and adapt as your priorities change. Our approach enables you to scale and deliver projects faster without the need to increase headcount.

Because we are a service delivery company with full time employees under a genuine management structure, Audacia can augment your delivery team and help solve IR35 concerns.

The benefits of an external or augmented team

Audacia can place highly-skilled individuals within your team, providing the knowledge and experience you need to keep pushing  technology forwards. We offer consulting, engineering resources to meet your specific project or staffing requirements.

More than simply placing people however, Audacia is a "technology hub”. We work across multiple technologies and industries, acquiring best practice knowledge and experience that we bring to your projects. And because all of our consultants are direct employees of Audacia, we can ensure consistent quality of delivery – which means better outcomes for all of your projects.

Partnering with Audacia reduces IR35 risk, protects you against potential brain drain and helps to maintain the highest quality standards for all your project deliverables. To learn more about Audacia and how we can save your business from IR35 risks, contact us on 0113 398 4199 or email [email protected].

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