The expansion of the IR35 rules, a piece of legislation designed to tackle tax avoidance from ‘disguised employment’, means that businesses need to look at their IT contractors and plan for a new way of working.
The changes to IR35, which are being planned for implementation in April 2020, sees a shift of responsibility for determining worker status from the contractor to employer. This means businesses that have contractors running Personal Services Companies (PSCs) have to assess each individual contractor’s status and declare their role to be inside or outside the legislation. If it is inside, then both the employer and the contractor become subject to taxation as if the contractor was an employee. The same rules have applied in the public sector since 2017, which many believe has led to a decline in the number of IT contractors since; with some claiming that this has contributed to the increasing number of delayed and canceled public sector IT projects.
With the same rules coming in for the private sector in April 2020, companies are already preparing for such a major change, particularly it seems in the already highly regulated financial sector. HSBC and Lloyds Bank have already announced that they are ceasing with the use of freelancers and contractors. If the situation, as has already been experienced by the public sector, is replicated across all verticals from April this year, there will be huge gaps in IT projects and the day-to-day running of IT infrastructure, security and back-office functions. This is obviously a critical situation.
There also seems to be a severe lack of awareness within the private sector about IR35 and its consequences. A recent survey undertaken by Hays found that a third of private sector organisations who engage non-permanent contractors are unaware of IR35 reforms.
AJ Thompson, CCO at Northdoor commented,
“We have seen a huge impact in the public sector where the reduction of the number of contractors since IR35’s implementation in 2017, has led many to link the regulation to the increase in IT project delays and cancellations.
“With the regulation now expanding into the private sector we are anticipating a very similar situation, with businesses having a ‘knee-jerk’ reaction to adhere to the regulation, but as a result, suddenly finding themselves without the support and expertise on which they have relied on, in many cases, for years.
“What the private sector must learn from the situation in the public sector is that they must have an alternative plan in place. They have to bear in mind that they are now going to suffer a knowledge gap that could have huge consequences on the ability to adhere to other regulations and run their day-to-day operations. Many are looking to bring in other services and consultancies that are able to offer that expertise, but outside of the IR35 regulation, in to cover the gap.
“The private sector has to get its head out of the sand and start acting now,” concluded Thompson.