IR35 is coming to the private sector, and from April 2020 will change the face of contracting as we know it. This legislation has the potential to disrupt how contractors are used if firms fail to prepare adequately.

Tax legislation IR35 was announced in a slightly different capacity than was expected, with small firms exempt for now, but for many HR departments across the country, there is now a scrabble to appreciate how it will affect their business.

This is because the use of flexible workers, or contractors, has rocketed over recent years. In fact, according to the Resolution Foundation, Britain’s reliance on a contingent workforce is now so great that the number of temporary staff has increased 40% in just 10 years.

Whilst this encompasses the whole flexible working mix, we have seen a significant rise in firms using contractors to help fill short-term needs or finalise projects. Firms see flexible workers as a quick way to hire the specialist skills that they need, without the commitment of permanent resource.

But with the legislative changes now opening up firms to more risks, will we see this change? We’ve laid out all HR needs to know about the changes to the law and how it will affect their businesses going forward.

Why is IR35 needed?

As the recent BBC presenter pay scandal demonstrated, the use of contractors has become a grey area in recent years. Many contractors choose to provide their services by setting up their own Limited Companies, thereby operating on a business to business basis.

Whilst most businesses genuinely turn to contractors for consultancy services, the government suspects that up to a third of current contractors are really being employed and managed on an almost permanent basis – with little difference in the roles completed by temporary and permanent staff.

The issue this raises is that there is a difference in tax payments depending on whether someone is being fully taxed via the PAYE system or if they operate their own business.

The recent Eamonn Holmes furore is an example of just this – his freelance status meant his limited company has paid 19% corporation tax, not the 45% income tax he would have been liable for had he been a full-time employee.

Whilst we don’t know the exact details of the services he provided, and it may be that he was genuinely engaged as a freelancer in good faith, it’s this kind of uncertainty which has led the government to estimate that contractors wrongly assessing their tax status could end up costing the economy £1.2 billion by 2021/22. So it’s clamped down.

What are the consequences of getting it wrong?

Business are likely to be affected in three key areas, so it’s imperative HR gets up to speed with the legislation as quickly as possible.

1. Financial penalties

Hirers and recruiters now have the responsibility of assessing whether the contractor is ‘inside’ the scope of IR35. If so, and the party paying the worker fails to deduct National Insurance and applicable tax before paying the worker, then they are now liable for the unpaid tax and NIC payments, which could be a costly mistake to make.

2. Competition

The new legislation will require hirers to consider carefully whether an assignment is inside or outside of IR35, and it is likely that there will be some sort of liability for the hirer if this assessment is wrong – whether this be in terms of an ‘inside’ or ‘outside’ status. 

Perhaps of equal concern to HRs and the recruiters working with them however is that contractors will want to work for firms that understand the rules, and have taken appropriate steps to ensure compliance. In-demand contractors will want to work for businesses which understand the legislation and have put steps in place to abide by the changes.

3. Increased fees

One consequence of IR35 being implemented in the public sector was that contractors increased their daily or hourly rate. This was to compensate for the impact of their tax and NIC contributions being deducted at source. It could be the case this will happen in the private sector also, so HR departments need to be aware the cost of contingent workers could rise.

What does HR need to do?       

1. Get on top of internal processes

Apart from understanding the nuances of the legislation, one of the first steps HR needs to take is to audit how IR35 will affect the business – in terms of resourcing needs and current workers. Granted, IR35 will influence some businesses more than others, but until HR fully understands how the business will be affected, no long-term strategy can be implemented.

Much like auditors comb through finances, HR departments now have the chance to apply this meticulousness to people processes. Using IR35 as a catalyst gives HR the impetus to action a review of internal hiring practices. This has a twofold benefit – compliance and consistency – and considering the new financial penalties involved, this could help placate any internal worries.

Whilst using compliant agencies does help to mitigate these risks, there is still a significant new administrative burden on firms, which in most cases will fall on HR. Therefore, taking a proactive stance and mitigating potential risks from the offset will be key to a successful reponse.

2. Take responsibility for future hires

Once the human supply chain audit is complete, responsibilities need allocating, and it makes sense for HR to lead this. Stakeholders will need to be held to account, so having one department lead on people process is imperative for a compliant culture.

3. Be prepared for any disasters

It’s not hard to find examples of firms being ruined by their supply chains, and people are just as big a liability – whether they’re permanent or temporary.

Every company should have a people strategy and whilst it shouldn’t be set in stone, firms will require additional resource from time to time.

IR35 presents the opportunity to go back to basics and review how contingent workers are used, and when. This process can identify any red flags and help set a compliant tone.

It’s not the end for the contingent workforce

Despite the legislative change, IR35 is definitely not the end for contingent workers. Contractors provide significant value to many firms, and will continue to do so, but it should be noted there are also other options available for securing flexible resource – such as using bench consultants, or Statement of Work contracts.

Resourcing a business is no easy task, and HR already had a lot on its plate before IR35. This additional piece of legislation need not be a burden though, and the most successful adopters will see it as an opportunity to review current business practices and ensure a consistent, compliant culture.