IR35 As The Dust Settles
Six weeks on, and IR35 is a reality. It has not killed the contract market, but it has
accelerated three trends:
a) Use of Statement of Work engagements instead of Contingent Worker hire.
b) Use of ‘umbrella’ rather than ‘1 person Ltd company’ structures.
c) A move from contract to perm.
Statement of Work, which is where DF specialises, involves contracts defined in terms of the output / outcome wanted by a client, rather than the inputs (consultants/contractors) doing the work. Statement of Work can be priced in various ways. Fixed price may be appropriate for platform migration, where the first step is to replicate the functionality of the legacy system.
But most projects, whether or not formally Agile, involve the evolution of requirements, in which case fixed price usually creates discord: every change is an argument for an extra bill, often it can seem like the corporate equivalent of a builder offering an attractive initial price for your loft/kitchen extension, because they know that they will make their profit on the ‘extras’ you will inevitably need. As a result, Statement of Work assignments are usually priced on a Time & Materials basis, sometimes with interests aligned by making an element of the fee success based.
The enthusiasm for ‘umbrella’ arrangements over 1 person limited companies is
understandable in a Covid-weakened market which has allowed clients to dictate terms. Given this power, many clients have insisted on a ‘cost neutral’ transition to ‘PAYE only’ policies, with contractors shouldering all the burden of higher National Insurance and apprenticeship levy. But the war for talent hasn’t gone away, the pandemic may have caused a ceasefire, but that is unlikely to hold as the economy re-opens.
‘Public Sector IR35’ in 2017 resulted in the burden of the change being spread between the client, the agency, and the individual. By the time the dust has settled, we expect a similar result in the private sector, increasing the cost of using Contingent Worker contractors, and thereby encouraging businesses to consider alternatives. A glance at contractor forums online highlights another risk with forcing contractors to go PAYE: “If I am an employee for tax
purposes, why not for employment rights?”, which is prompting some clients to implement a ‘maximum 18 months’ rule, though in most cases the loss of ‘institutional memory’ and costs of staff churn is likely to exceed the employment law risks.
The cycle of corporate fashion between relying on lots of contractors, and preferring permanent headcount, is one that plays out every decade or so. Even before IR35 and Covid, we were seeing a swing towards perm. Covid has put up barriers to people changing their client/employer allowing some companies to cut costs by telling former contractors their £550/day contract won’t be renewed, and the only game in town is a staff role on £65-75k + benefits. Short term costs have been cut, and that may have been essential for business viability where revenues have been hit by lockdowns, but time will tell the level of loyalty, motivation, and eventual staff churn, engendered by such take-it-or-
leave-it change of status. I suspect that, as in previous decades, the pendulum will swing back.
For all these trends accelerated by the rule changes, it is as well to remember that the IR35 changes that occurred on 6 th April 2021 did not alter who was inside IR35 and who was outside. IR35 came in 21 years ago on 6th April 2000, the changes this year are not about ‘catching more people’. But they do make enforcement an issue for the client and the agency (‘fee payer’).
For the first 21 years of IR35’s life, a contractor’s one person limited company served as firewall that protected everyone. Once the client/agent had paid that company, what happened within it was down to the director (typically the contractor). And, if the contractor was caught by IR35, but paid themselves in dividends anyway, when HMRC issued the bill for unpaid National Insurance, the contractor could just fold the company and start a new one. It might well have been the pile of judgements in their favour that HMRC could not collect due to folded companies that drove their desire to be able to pin the bill on the client/agent: typically big companies that would not be running away.
An interesting by-product of pandemic lockdowns, has been a change in working practices that has probably put many more contractors genuinely outside IR35.
Work from home is now an accepted part of most white collar roles, whether contract or permanent. And ‘home’ need not even be in the UK: I have friends who have loved relocating to the Caribbean for the duration. The ability of a worker to determine where they do their work is one of HMRC’s indicators that point to being ‘outside IR35’ (albeit that it alone is not necessarily decisive). In most cases, work from home also confers de-facto discretion about hours of work: it becomes practical to take a break from 3.30pm to 5.30pm, while children
are collected from school & a family tea is enjoyed, before the next generation begin their homework and aged parents resume their toil.
Choice of working hours is another one of those HMRC indicators supporting an ‘outside IR35’ status. As is a worker’s provision of their own ‘tools of the trade’, such as an ergonomic chair, desk and internet connectivity. The inability of an employer to monitor physical presence in an office has forced them to look at outputs, rather than just inputs. In many cases, particularly in SMEs, up to 2019 managers restricted work from home to a select group of trusted senior staff, for fear that less trusted individuals would abuse the ‘privilege’: now, rather than have policies designed to manage the lack of trust, it is a case of sacking those that can’t be trusted, and freeing those that can be trusted to get on with their jobs, with the visible outputs making details of hours worked almost academic.
Dynamic Futures Statement of Work engagements offer clients threefold protection from IR35 and associated risks:
1. The Statement of Works means that, in IR35 terms, Dynamic Futures is the ‘End
User’, so how staff are paid is not the client’s problem.
2. Dynamic Futures consultants are typically PAYE employees, so even if there was no Statement of Works, there would be no IR35 liability as HMRC is already getting all it wants from the consultants’ pay.
3. Dynamic Futures project management processes creates an audit trail that also
proves the direction & control exercised by the company, thereby shielding clients from co-employment claims (such claims are also made unlikely by the fact that DF consultants are rewarded well, and are supported by a Head Office that focuses on nurturing its talent).
For help solving IR35 (including solutions for agencies who have no control over status determinations, but find themselves unfairly in HMRC’s firing line), or to discuss Statement of Work requirements, Contact Dynamic Futures on 020 7603 4598, or complete the form below.
By James Dunlop, Immigration Specialist and Founder of James Dunlop & Co.