IR35 for Private Sector: How Is IT Impacted?

Few sectors arguably rely on contracting more than the IT sector, so it should come as no surprise that the upcoming IR35 rule changes are making a big impact in the UK’s home industries.

In fact, it’s been estimated that almost 75% of UK organisations aren’t ready for the upcoming IR35 changes. Such hesitations and anxiety over the future has also directly impacted contractors: the Office for National Statistics (ONS) has recorded a 2.4% decline in IT contractors between 2018 and last year, with many expecting this fall to continue as IR35 spreads into the private sector.

Let’s summarise: many companies face expanding IT needs, yet the available talent is becoming more and more restricted. Projects will become harder to complete and new initiatives will lack the forward-thinking expertise to gain the most success, all of which leads to a loss in value.

Clearly, something needs to be done.

I’d like to use this opportunity to first explore IR35 in more detail, before showcasing how a partner company provides a much more effective and legally compliant method moving forward…

What Is IR35?

IR35 actually refers to two different rulings. The first is the original legislation, designed to prevent tax avoidance by employing workers through limited companies as contractors and thus not applicable for national insurance payments and taxation.

Secondly, there’s an additional clause known as the “Off-Payroll Reforms” for the payroll. However, since we’re focusing primarily on the private sector, we won’t explore this second one in detail.

When did IR35 come in?

IR35 itself has been around for a long time, as you can tell by the Inland Revenue marker, and was originally implemented in April 2000. While Inland Revenue later became Her Majesty’s Revenue and Customs (HMRC), the IR35 moniker has stuck around.

However, this original legislation was poorly received and criticised extensively. The upcoming changes are meant to address these concerns and it is these new IR35 rulings that are currently threatening the private sector.

Who falls under IR35?

The main focus of IR35 is to properly tax “hidden employees”. This refers to situations where certain employees work just like any other employee, but are paid as a contractor rather than a full time employee. For example, if the middle company/intermediary company was not there, would the situation change at all?

The big issue with this is that it’s not a completely clear cut definition. HMRC can inspect companies and determine the validity of specific cases. To put it another way, it’s up to companies to determine the IR35 status of their employees and they will be held responsible, pending HMRCs decision in an investigation.

When Is IR35 Applicable?

Specifically, there are three key factors that can determine a contractor’s status. We’ll also explain them in the scope IT contracting as well as, just to make it even more clear.
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Before we dive in, it’s worth nothing that these factors will look at both the contract between the agency and the client, as well as that of the contractor and agent, where applicable.

Control

A key factor in determining IR35 status is how much control a company has over its supposed contractors. In the majority of situations, contractors should have a certain amount of leeway in how they approach their duties or project. While they shouldn’t be micromanaged, companies still expect them to achieve certain targets and goals. Contractors are – as the name implies – contracted to perform specific duties and this is what the ‘control’ factor looks to.

On the other hand, a contractor that has open ended duties that change on a daily basis could arguably be labelled as a ‘hidden employee’ – there’s no contractual agreement controlling what they do, as they’re essentially part of the wider organisation.

Other factors can include working hours, breaks, direct supervision by a manager or even staff benefits – all signs of a hidden employee.

IT Context: Your internal team works on all your products and applications. Some of this team are PAYE employees, while others are contracted. Since they all work the same hours and conditions, including line management, your contracted team may in fact be hidden employees.

On the other hand, you contract a consulting company to assess and improve your Cloud infrastructure. There are clear goals and the Architects and Engineers set their own hours and processes, so long as they are agreeable with your own procedures and still meet the deadlines. This is contractual work designed to help your company meet an important goal. Additional duties and tasks can be discussed, but they do not happen without additional negotiation or talks to amend or extend the assisting agreement.

Substitution

Similarly, how easy is it to substitute the employee? If a company is contracting a specific individual from a secondary agency, this could be seen as uncompliant with IR35.

A contractual business is providing its own services directly to a client company, not specific individuals. While having the same individual is always best practice – to help build better relationships and reduce on-boarding within the project – it cannot be a set requirement.

A key indicator for this is a substitution clause within the contract. Such a clause would define the client company’s rights to substitution, and the contractor’s obligation to provide substitutes when needed.

That being said, it’s also important that any substitute is of the same experience and skillset as what was originally asked for. This means that it’s the burden of the contractor in terms of training replacements or making other arrangements, such as travel. This is part of meeting the original service promised.

IT Context: If you contractually hire the services of an IT company – let’s say to build a new application – then it is up to that contractor to provide the team responsible. If the agreement is to provide a certain number of people or hours per day, then it is up to the contractor to ensure people are available and actively working, even if the specific roster itself changes, so long as all who work on it are qualified and experienced. When changes do occur, this may mean the contractor has to bring new replacements up to date with the project’s current process.

Similarly, if the agreement is simply to deliver the project by a certain point, the contractor again has to determine how many people are needed in terms of manpower and expertise. The goal here is to deliver the agreed project on time, rather than limiting this to specific people.

It’s worth noting here, however, that many companies have a preapproval process and this is entirely normal. Many projects or tasks require a certain level of expertise or unique skillsets and many companies want to feel safe with their partners.

Obligation

Unlike employees, companies have no obligation to provide contractors with ongoing work. After the specific task is done, companies are free to negotiate new work, seek an alternative contractor or simply stop this work altogether. This is a key difference between a true IR35 compliant contractor and a hidden employee.
Unlike the other two factors, this issue of mutuality of obligation can also occur when contracts end. If contracts are continually renewed (again, with specific individuals, as mentioned above) this can potentially indicate an IR35 issue. To quote HMRC directly:

“Where work is regularly offered and accepted over a period of time a continuous contract of employment may be created. The parties may claim that between each offer and acceptance of work there is no obligation to offer or accept further work. But such an obligation can be implied in certain circumstances” [source]

IT Context: If you’re choosing a partner to provide ongoing support, this needs to be clearly expressed as a service provided by the partnering agency. If, alternatively, specific individuals are providing this service on-site, working with your own team and having the contract continually renewed, this could be seen as a potential issue.

However, there are a number of alternatives; specifically, as the need for ideal technology grows, isn’t better to partner with a trusted company, rather than contracting individuals and all of the risks that come with it?

So, if you’ll excuse our personal bias, I’d like to talk through the benefits of partnership, before we get into the context of IR35, its challenges and how this might be the best way to move forward.

A Safe Way To Acquire Talent

For big companies, such as Barclays, that have dedicated support teams around the clock, IR35 compels them to switch to PAYE rather than using contractors. Others have also used umbrella companies, but the real challenge is for people who need occasional work, but want to have dedicated support they can count on.

In this case, IR35 can be much less of a hindrance than it might first appear to be.

We’ve seen this ourselves with many companies that want to move away from simply outsourcing via the cheapest contractors on the market. As technology and the respective IT demands get higher, the need for trusted partners increases exponentially.

In other words, having trusted consulting and development partners, paired with in-house support, is the way to go moving forward, rather than relying on sourcing specific skillsets internally on an ad-hoc basis.

Partners are not contracts

When you have specific goals in mind, whether it’s launching a new service, migrating to the Cloud and getting innovative with data, you need a partner to deliver this goal. A contractor, on the other hand, is also looking to sustain their own employment.

As a partner, we’ll recommend the right technologies, tools and delivery approach, creating the team to suit, while contractors will limit your options to their particular experience.

If that’s not enough, let’s not forget that we’re safe from a legal point of view – and not just because we’re based outside of the UK. As a software house, we are contracted to deliver a specific product or goal, so there’s a clear indication of our relationship being one of mutual business, with no hidden employees in sight.

Wider range of expertise

With a partner, you’re also gaining access to a wide range of expertise.

This also means that, when one person isn’t available, we have entire teams of equally trained and disciplined experts to ensure we’re still working on any given project.

With IR35 rule changes, on the other hand, contractors may start to get a bit hesitant. They might leave, go full PAYE with a major company or otherwise limit their availability. The benefit of an entire company, on the other hand, is that all the challenges (and, as we’ll get to later, the obligation of substitution) is on us. A single person going on holiday will not slow down progress.

Faster time to market

Need to produce something quickly to hit the market and start producing revenue? Trying to individually source an entire team – especially in a post-IR35 world – will certainly take a long time. Partnering with a specialist provider, on the other hand, is much more efficient, as it’s our job to put this dream team together, not yours.

Partners In The Scope Of IR35

So, where does that leave things in regards to IR35? Let’s go over the three key factors from earlier:

Control

Are developers contracted to perform specific tasks?
Yes, by partnering with an agency, we are contracted to perform specific duties, as well as source responsible developers.

Are developers contracted to operate at certain working hours?
Unless the tasks require specific meetings or other time-based events, we work to complete the project during our working hours, as long as it fits your deadlines and goals.

Are developers contracted to operate at a specific location?
Again, no. We operate within our own offices. We can often visit to meet your teams and experts, but we typically work from our Polish offices.

What about staff benefits?
Nope, not at all! We’re not your employees and you don’t provide any benefits at all in this regard.

Substitution

Can employees be substituted?
Of course! It’s our obligation to meet your goals and, to this end, we create the ideal team for each project. That said, life happens and, when a developer isn’t available, we are responsible for finding a replacement from our 700+ specialists.

What about skills and experience?
When we provide substitutes, they will always be of the same skill and experience. Our goal is to meet your needs, so we don’t diminish the agreed-upon team during the project’s duration.

Obligation

How does a partnership work?
Like all business, partnerships are based on contracts. You can contract us for specific tasks and duties. When those have been fulfilled, contracts can be renewed. In this way, our services are specialties are available when you need it, with clearly defined objectives in terms of deliveries and expectations.

What about continuous work?
This happens sometimes, especially for the likes of maintaining larger projects. Companies choose to continue to work with us because we know their business inside out and deliver the best results – however, they are not obligated to do so in anyway and have all the documentation necessary to go it alone or source help elsewhere. The key difference here, in regards to IR35, is that we’re providing a service, not strictly the individuals responsible.

Want to know more? Get in touch with us today and let us take care of any upcoming IT needs! You can talk to me directly on LinkedIn or use the form below.
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Sources

• Three-quarters of organisations not ready for new IR35 rules
• UK tech freelancer numbers down for first time in 5 years since IR35 tax reform hits public sector