IR35: An opportunity to rethink how skills are sourced?

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Before the pandemic the conversation around the extension of IR35 into the private sector was dominated by reports of blanket-bans on contractors and fears of bureaucracy. But, as Ashleigh Webber reports, organisations may now see it as an opportunity to think about how they source the skills needed for recovery.

There’s been no shortage of bad press about the extension of the off-payroll working rules – known as IR35 – to the private sector since it was announced in the 2018 budget.

Originally due to take effect in April 2020 but delayed until 6 April this year, the rules – which shift the responsibility for determining contractors’ employment status for tax purposes to the organisations engaging them – have been heavily criticised as being poorly conceived, badly implemented by HMRC, and for placing a significant burden on smaller businesses.

There are also concerns that the rules, which have been in place in the public sector since 2016, have deterred organisations from using contractors altogether – potentially limiting the talent and skills they are able to access.

The fears among contractors are so great that more than half plan to quit self-employment for good and a sixth plan to return to full-time employment, according to freelance trade body IPSE.

But has the reality turned out to be what they feared? With just three weeks to go until the changes take effect, businesses have been looking closely at their skills-sourcing practices and processes to ensure compliance with IR35 and, perhaps surprisingly, some are now seeing the investment they have had to make as an opportunity to rethink how skills are sourced. This could work in contractors’ favour as businesses begin to ramp-up activity as we emerge from the Covid-19 crisis.

“There’s going to be a huge demand for talent, and the questions will be: ‘how do I find it?’ and ‘how do I find it fast?’” says Henrik Smedberg, head of intelligent spend management for UK and Ireland at software group SAP Ariba and SAP Fieldglass.

“Some of this legislation heightens the awareness of, and the need to take control of, finding the right talent, retaining the right talent, and making sure that we can manage it.”

Research by SAP and Oxford Economics found that 42% of workforce spend is allocated to external workers (24% on contingent workers and 18% on service providers).

Only 35% are using technology to manage these workers. But some of the systems organisations will be using to manage IR35 compliance will also help them take better control of how talent is both sourced and managed – for example, keeping contact details and information about skills in a central database, which can be accessed easily when needed.

Access to temporary resources

Smedberg suggests that organisations should be turning the conversation surrounding IR35 on its head. Talking about it in the context of how to lawfully access people with the right skills will resonate with senior leaders more than the discourse condemning it as another burden on business.

“Most of the companies that come to us are looking at this as through the lens of ‘how do we make sure that our external labour helps us get out of this trouble that we’re all in right now?’,” he says, adding that its study found 62% of executives say the external workforce provides extra capacity to handle peaks in demand and 54% say it helps them recover from business downturns.

Julia Kermode, founder of independent worker resource IWORK, suggests the expected drop in demand for contractors has perhaps not been seen because businesses need temporary access to certain skills to recover from the pandemic.

With it generally taking around four months to source a new employee, many have been utilising a contingent workforce able to begin working with a considerably shorter lead time.

“At the moment we are seeing firms engaging short-term contract resources to support their post-pandemic business recovery, rather than hiring permanent staff whilst things are still very uncertain,” she says. “This trend looks set to continue.”

Visibility and control

The impending IR35 deadline has also presented organisations with an opportunity to “spring clean” their processes and clarify responsibilities for contingent workers internally, adds Kermode.

“This spring cleaning is perhaps overdue for some, particularly in larger firms where it can be difficult to keep track of all contractors, or where it is unclear whether contingent workers are the responsibility of HR vs procurement,” she says. “In general, firms have been improving their contracting processed by evolving to centralised procedures in preference to managers being free to bring in any resources as needed.”

This action has also been observed by Tania Bowers, head of public policy at the Association of Professional Staffing Companies, who suggests the expansion of the legislation has encouraged employers to fully understand who they are engaging and where.

“Contractors are often scattered across a business – they aren’t managed by one specific function… As a result, many firms will often have limited transparency around the complete investment that is being directed to contract workers.

“The changes have made it more of a necessity for a business to have control over this information, which will only benefit organisations that are engaging contract workers regularly. Not only will this insight be valuable in streamlining costs, but it will also help employers take a more holistic approach to flexible skills. By knowing what resources are being deployed, it will be much easier to identify what contract resources are engaged with the business and can therefore be utilised elsewhere in the company to fill emerging demands,” she says.

Risk of losing talent

However, not all organisations agree that IR35 has presented them with these opportunities.

Christina Brun Petersen, co-founder of freelancer “marketplace” Worksome, says many firms risk losing access to the best talent because they are not addressing the changes in a sensitive or sustainable way.

“In the financial sector many banks have taken the approach of forcing freelancers to become permanent members of staff and sign-up to PAYE tax, which in reality means taking a pay cut, while in the media sector we’ve seen companies similarly requiring freelancers to join PAYE,” she tells Personnel Today. “The irony is that both of these sectors employ a huge number of contractors, yet they are taking such a broad-brush approach to dealing with IR35.”

She says businesses are seeing permanent employment as the easiest way to avoid having to address the legislative changes.

“However, this approach entirely neglects the fact that many contractors do not want to work as permanent employees, take the necessary pay cut and also lose an aspect of freedom. Ultimately these businesses will lose access to the best talent, because the best freelancers will simply go elsewhere where they are not forced to become permanent employees,” adds Brun Petersen.

James Poyser, founder of the offpayroll.org.uk advice website, says the inside IR35 contractor community is pushing back on the idea of being taxed like an employee, but not being given the same benefits.

“The question [for organisations] is, what type of resource do we need? Do we need flexible, additional capacity to give our teams headroom? If so, it sounds like you need a temporary employee, and should consider the full package, employment proposition for these individuals,” says Poyser.  “On the other hand, if you need specific skills to deliver specific outcomes it sounds like you need a service supplier – which means engaging someone who’s outside IR35.”

He adds that while some may feel compliance has become complex, it hasn’t become complex enough for organisations to simply ignore the benefits the contingent workforce can bring.

“As the entire supply chain gets used to dealing with this – as we all have for other legislative matters such as GDPR, Anti Bribery Act, and Criminal Finances Act – the wheels will start moving again. There are some brilliant compliance solutions appearing from many vendors designed to remove the risk and complexity of managing IR35,” he says.

Adjusting practices

In most cases, organisations will need to make some simple adjustments to ensure their contractors genuinely are engaged in a way that is compliant with the legislation. This may mean distancing them from the employed workforce, suggests IWORK’s Kermode.

“This may seem counter-intuitive to HR teams or line managers looking to integrate their broader team, but that is exactly the point – contractors are not part of the staff team, instead they are simply a business purchase brought in to deliver agreed outcomes,” she says.

As organisations continue with their preparations ahead of the 6 April deadline, caution is urged.

Katherine Pope, senior associate at law firm Bryan Cave Leighton Paisner, says that the rules bring in additional legal obligations for firms, such as using “reasonable care” to make status determinations, as well as the administrative burden and cost of running payroll for engagements considered to fall inside the rules.

“All this comes at a time when we are looking for an economic recovery. Many employers are already suffering from the effects of the lockdown restrictions, and the rules are likely to make the use of contractors as a flexible and low risk labour resource more expensive,” says Pope.

Merrill April, a partner at law firm CM Murray, says that the required status determination statements, which declare a contractors’ employment status, don’t come without their challenges. Many many firms are likely to base their statements on HMRC’s Check Employment Status for Tax (CEST) tool, which is complicated to use and considered to give unreliable results by some users. HMRC may also challenge the status and an employer’s justifications for it, she says.

Recovery

As organisations continue on their path to recovery, it is unlikely that they will cease to use contractors completely come 6 April – particularly if they need to scale up rapidly after having been forced to make redundancies over the past year.

“History has shown that the number of contractor engagements rises rapidly as we exit downturns. We witnessed this post 9/11 and post-2008,” says Offpayroll.org.uk’s Poysner.

“In 2008, the contracting market returned to pre-downturn levels 18 months ahead of the permanent market. It’s obvious why: if business confidence is increasing, hiring a contingent workforce is a low-risk approach to deliver change and growth. It’s easy to scale up, and back down if needed.”

SAP’s Smedberg suggests that this will put independent workers in a strong position in terms of what they can charge organisations. Many are likely to work in an organisation for a few weeks to complete a task and may return again months later when their skills are required again. This will require organisations to think about how they “offboard” their contingent workforce

He says: “It’s really important to consider the message we leave them with, and the perception of how we are treating them. Do they want to come back? Because that’s going to be really important as we recover.”

The fact that the government has waived penalities for IR35 non-compliance for a year may also work in favour of both organisations and contractors, perhaps giving them enough breathing room to consider longer-term plans for skills sourcing.

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