Will the delayed IR35 rules still impact the flexibility of your business?

The coronavirus situation has highlighted the importance of flexibility in every business. Will the now delayed changes to the IR35 rules give you the flexibility that you’ll need?

Off-payroll working rules, known as IR35, is a piece of legislation that allows HMRC to collect additional payment from businesses who utilise contractors, but who are employees in all but name. Also known as ‘disguised employment’, it is a term used for contractors who provide services through personal service companies. However HMRC believes they are and should be treated — and taxed — as employees.

The implementation of IR35 was planned for 6 April 2020 but will go into effect 6 April 2021 due to the coronavirus pandemic’s potential impact on the economy. Chief Secretary Steve Barclay confirmed yesterday that this is only a delay and that the measures will go into effect. These reforms will impact medium to large companies in the UK, but does not apply to those contractors working for overseas companies.

Is the delay already too late?

Several large Banks, to include Barclays, Lloyds, HSBC, Deutsche Bank, and RBS, have said that they will no longer hire UK contractors due to the complexity of the IR35 regulations. Others like BAE Systems have put allof their contractors inside IR35. This means that contractors in the UK private sector will have to pay the same tax and National Insurance contributions as permanent employees, despite not receiving the same benefits. These benefits might include holiday, sick pay, and parental leave, which contractors say effectively cuts their income by as much as 30 per cent.

According to research conducted by the IPSE (the Association of Independent Professionals and the Self-Employed), nearly a third (32%) of freelancers are planning to stop contracting in the UK due to IR35. Confidence from both employers and contractors is not boosted by the government’s level of support and the Treasury’s inconsistent Check Employment Status For Tax (CEST) tool.

What are the implications of the new IR35 rules?

We are living in unprecedented times and now more than ever, companies need to take action to scale (either up or down), improve performance, and reduce risk. They can do this by revising their IR35 approach in conjunction with how they support business processes with an outsourced software delivery model.

According to IPSE, nearly all contractors surveyed (97 percent) are concerned about changes to IR35, and 92 percent feel that paying National Insurance Contributions without employee rights is unfair. Who wants to employ unhappy employees or contractors from the beginning of an engagement?

Those freelancers who remain contractors are likely to increase their rates to cover the IR35 shortfall as they will have to contribute more National Insurance and tax as employees without the benefits. The costs to businesses are hidden and financial. The implications of hiring more staff, keeping on disgruntled contractors, or managing some sort of third party vendor will undoubtedly have repercussions on resources, productivity, team morale, flexibility, and business scalability.

The flexibility of hiring contract staff is in having the ability to scale up and scale down at the need of the business. Hiring employees — whether they are IR35 or ‘regular’ employees does not allow for this flexibility.

Simplify

It is not all bad news. Instead of having weeks, businesses now have vital time to prepare for this reform. Barclay confirmed that the decision by the Treasury was “a deferral, not a cancellation, and the government remains committed to reintroducing this policy”.

What should you be doing now? Focus on business objectives first. Staff your team with a development partner that will reduce your IR35 burden, maintain consistent rates, and attract the best talent. Utilise an outsourced, outcome-based, Team-as-a-Service delivery model that reduces your risk from the beginning of the engagement and enables your business to scale up and scale down as business priorities and needs dictate. By shifting from contractors to outsourced partners who have a proven track record, you reduce your IR35 burden and the need to comply with complex legislation.

If you’d like to find out how Tarmac can help you navigate the IR35 issues by working with a team of development experts that has successfully delivered over 150 projects across five countries you can read all about our amazing team here.

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About Tarmac

Tarmac designs, builds, scales, and supports exceptional software.

We are technology agnostic and leverage a wide array of modern languages like Ruby, Javascript, Python, and Java. We help our clients deliver higher quality software quicker by relying on our proven software development approach, the “Tarmac 10”.