The IR35 divide

As we slowly emerge from the difficulties of the last 18 months, the outlook for the economy appears bright.

We are beginning to see investment levels start to rise, high streets starting to reopen, and the economy showing signs of recovery. According to the REC’s report on Jobs for June, “The steady return to more normal business operations, improved market confidence and greater demand for staff all drove a further marked increase in recruitment activity in June. Permanent staff appointments expanded at the quickest rate since the survey began in October 1997”.

Particularly interesting was the news that “temp billings growth hit its highest for nearly 23 years”. This is surely a sign of businesses looking to get back to pre-pandemic levels but not quite confident enough to respond by taking on permanent employees.

While this might sound like a positive for contractors, the introduction of the IR35 reforms to the private sector earlier this year has created a divide within businesses that is likely to get worse as a result of recent good news.

Attracting talent post IR35 reforms

In a recent article, IR35 reforms – Warnings becoming a reality, we highlighted how the war for talent was probably the most significant risk of all to engagers as the economy began to recover.

The loss of specialised and high-calibre talent due to “inside IR35” determinations or blanket statements was repeatedly raised as a threat to engagers looking to circumnavigate the IR35 reforms. Contractors migrating to companies offering “outside IR35” assignments are leaving huge skills gaps and gaping holes in project capability and success.

Critically, this is not likely to happen gradually over time; it is happening almost immediately. We already see examples across various industries where engagers took a blanket approach and ruled all of their PSC contractors inside IR35 and suffered an almost instant loss of a significant and skilled section of their workforce. Leaders and Managers are now struggling to attract the talent and expertise needed to complete work and projects on time and to standard.

The costs of losing business, missing deadlines and project failure

This is where the divide caused by the IR35 Reforms really begins to tell.

The incorporated costs of failing to deliver on projects or missing deadlines for delivery can often reach hundreds of thousands, if not millions, of pounds depending on the size of the project.

Additionally, there is also the opportunity cost of future projects and work lost due to incapacity to deliver. Add in the costs of brand and reputational damage due to poor project delivery, reduced quality and extended completion times, and the potential impact on a business’s profit and loss is difficult to ignore.

Legal and taxation – IR35 risk-averse

In many cases, higher volume contract engagers have taken advice from legal departments and advisors to avert the IR35 legislation due to the risks and potential costs involved. It’s true that should an engager be found to have made an incorrect IR35 status determination, then the liability for any unpaid taxes and NI would fall upon them.

However, are the amounts of tax and NI accumulated really going to hit the hundreds of thousands that a failed project might incur?

HMRC has also actively promoted a soft introduction for the reforms, so engagers have the first 12 months to get their processes right before facing any financial penalties for incorrect determinations.

As an extra safety net, an insurance policy that supports a strong compliance process can almost completely wipe out the risk of IR35. Policies provided on the strength of the compliance process will usually include First and Upper-tier tax tribunal representation, cover for previous tax years for up to six years, and cover all defence costs, including liabilities and penalties.

Therefore, engaging with suppliers with insurance protection should leave engagers with very little to fear from HMRC’s transfer of debt provisions and everything to gain from a talented contractor workforce keen to provide their services.

The risks and costs associated with IR35 cannot be discounted. However, are they really comparable to the risks and costs associated with the inability to provide a service or deliver against a project brief?

Time to re-think your IR35 strategy?

It’s not too late to implement or change your process regarding IR35, and we encourage anyone responsible for IR35 compliance to ensure that your determination process is fit for purpose and meets HMRC’s reasonable care requirements.

To help you reduce IR35 risk, retain a competitive advantage and meet your reasonable care responsibilities concerning IR35 compliance, Workr Group’s specialist team can provide impartial advice and support.

For a free, no-obligation audit and assessment of your IR35 compliance process, you can speak directly with Andy Webster, Founder and Director, Workr Compliance, on 07827 810851 or at aw@workrgroup.com.

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