IR35 in Business Transformation

IR35 in Business Transformation – Brave New World or Business As Usual?

Talk to a hundred people about the upcoming impact of IR35 on the private sector and you’ll get a hundred different answers.

For some, it’s the biggest upset the UK contractor market has ever seen, heralding sweeping changes throughout the commercial landscape and shaking the concept of flexible working to its core.

For others, it’s a clumsy and poorly-planned HMRC initiative that will disappear rapidly from news headlines, only impacting a negligible portion of the contractor community as it fades from the collective consciousness.

For interim workers in the transformational change community, what’s the reality?

Are we entering a daunting new chapter of professional contracting, or is IR35 simply a new coat of paint glossed over the status quo?

A bit of background

It’s common knowledge that IR35 itself is nothing new.

The framework has been around since 2000, but as of next year a new take on the existing legislation will be introduced.

Mimicking the change made in the public sector in 2017, from April 2020 the responsibility of deciding whether the status of a contract worker in the private sector falls inside or outside the specifications of IR35 will rest with the ‘fee-payer’, or employer.

According to HMRC’s own definition, IR35 will apply:

“if a worker provides their services to a client through an intermediary, but would be classed as an employee if they were contracted directly”.

Whereas currently the risk of falling foul of IR35 is assumed by contractors and providers of contract services, April’s switch sees clients shouldering the burden for determining who should in fact be classified as an employee – and also landed with the bill for unpaid tax and National Insurance contributions if contractors are found to be in violation by HMRC.

What is IR35 actually clamping down on?

IR35 was designed to close the door on ‘disguised employees’ – workers engaged by employers on long-term agreements in order to leverage the tax benefits of contracting when they are all, to all intents and purposes, employees.

HRMC introduced the legislation to differentiate more accurately between faux and legitimate contractors, based around three core criteria:

Supervision, direction and control

Contractors whose reporting arrangement and scope of work reflects that of a manager>employee relationship risk being categorised as inside IR35.

If the client can dictate when, where and how work is to be completed, the chances of this being deemed a legitimate contractor partnership diminish.

Mutuality of obligation

IR35-friendly engagements must lack any obligation on the part of the client to continue providing work to the contractor, and the contractor’s obligations must similarly omit any ongoing commitment to serve the client.

Contracts which have no fixed term and are ‘rolling’ in nature are more likely to be judged as disguised employment agreements.

Substitution

Contractors operating outside IR35 must reserve the right to provide someone in their place to deliver work, as long as it complies with agreed standards and service levels.

From HMRC’s perspective, obligation to deliver work personally equates to an employment relationship and is consequently inside IR35.

How are companies reacting?

Although there have been some well-documented cases of companies responding with a wholesale shutdown of contractor use (such as HSBC’s mass-conversion of contractors to permanent employment status), many businesses and employment agencies remain unperturbed in their use of legitimate contract workers, adjusting their contracts and engagement structures to ensure increased compliance with the forthcoming change.

With a widespread suspicion that large, high-profile employers are at particular risk of targeting by HMRC – as typified by the recent letter to GSK – SMEs in particular have shown relatively little reaction, and certainly there has not yet been the vast shift to overseas resources or other cost-cutting solutions that many predicted by businesses seeking to dodge the sudden burden of inflated NI costs.

There is also a question mark over HRMC’s capacity to enforce the planned changes, highlighted by the admission that over 4 million inbound calls go unanswered each year.

Further fuelling the buoyancy among users of genuine contract workers has been HMRC’s unsuccessful attempts to implement effective self-serve tools for contractors seeking to determine their IR35 status, as well as serial difficulties in prosecuting perceived IR35 offenders.

Earlier this year, TV broadcaster Lorraine Kelly successfully appealed a £1.2m tax bill after mis-application of IR35 criteria.

At the same time, the government’s own CEST tool was found to have generated results contrary to the outcome of the hearing – calling its accuracy into question.

What can contractors do to protect themselves?

Despite the fallout from IR35 appearing less immediate and severe than anticipated in some quarters, there are nonetheless some practical steps that contractors can take to ensure that they remain compliant in their work:

Not only is it essential that contractors fully understand the IR35 framework, it is important that they be able to work actively with clients to create engagements which keep both parties free of risk.

Foundational to remaining outside IR35 is ensuring that contractual engagements do not resemble employment agreements – instead, they should read and function as commercial contracts, detailing services to be provided from one business to another.

Genuine contractors are not afforded the benefits and securities of direct employees, be it paid holiday, pension contributions, sick pay or other entitlements.

As such, contracts and agreements which govern their work should reflect this difference – focusing on time-bound deliverables and SLAs instead of reporting lines, working conditions and other employment-focused arrangements.

Ultimately, the flexibility and opportunity to import interim expertise in the form of genuine contract services remains a win-win for both contractors and clients.

Users of contract services need the agility and cost-effective nature of contractors, whilst contract professionals require the features of the framework contracting creates in order to be able to meet market demand.

What does IR35 mean for the business transformation sector?

Compared with some other areas, business transformation has the in-built ‘IR35-compliant’ advantage that the majority of projects are designed specifically around implementing a defined change within an organisation.

By extension, the scope of projects tends to include clear deliverables bound by specific time-frames, helping distance transformational change programs from engagements which could be deemed ‘disguised employment’ in nature and consequently fall within IR35.

Notwithstanding, contractors operating in the interim change field are well advised to adhere to the same precautions as other sectors – adjusting their engagement terms and operating processes to steer clear of mis-categorisation as employees. 

This is especially true for change leaders whose expertise is retained via contractual extension after a key project has been completed. With many change experts working inside client organisations for several years, the need to revisit engagement terms and update project deliverables helps enable ongoing collaboration without risk of a ‘rolling contract’ status being flagged by HMRC.

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About Capex

CAPEX Human Capital are a specialist provider of interim and permanent Change Management and Transformation professionals.

We represent an active network of highly connected independent Change Management & Transformation specialists who provide solutions for Business and IT Change, Digital Transformation, Expansion, Development, Business Innovation, Breach of Regulations and Compliance, Critical Solutions, Business Agility, Cost Optimisation and more.

For more information, visit www.capexhc.com