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IR35Latest NewsLabour marketPay & benefitsTemporary employment

Could IR35 be a force for good in a flexible labour market?

by Matt Fryer 17 Feb 2022
by Matt Fryer 17 Feb 2022 A clear IR35 strategy can help organisations flex to the needs of the labour market
Shutterstock
A clear IR35 strategy can help organisations flex to the needs of the labour market
Shutterstock

It’s hard to avoid negative headlines surrounding the IR35 or off-payroll legislation since it came into effect for private sector employers last year. But with a robust strategy in place, employers can still attract the best flexible talent, argues Matt Fryer.

There are many who are still keen to repeal the IR35 changes that came into effect in April 2021. This is understandable, given the challenges that these changes have presented for businesses over the last two years.

However, as our economy looks set to recover from the pandemic, there is an opportunity now to reassess the benefits that a robust IR35 strategy can deliver for more flexible and agile ways of working.

Having a tax framework in place that allows companies to make the most of their flexible workforce and that allows skilled individuals to continue contracting is vital, especially for sectors that heavily rely on contractors for growth.

This is why the original IR35 legislation was introduced in April 2000. Many in the industry would agree that it is time to get this right, but this is not just the government’s responsibility.

Where are the challenges?

In December, Brookson Legal conducted research speaking to senior decision makers with IR35 responsibility in 500 medium-to-large businesses. We wanted to know what they considered the biggest challenges posed by the changes, as well as the benefits.

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As businesses took steps to avoid the tax liability, many identified other risks from having a poor IR35 strategy. More recognised commercial risks, including contractor costs (53%), talent attraction (42%) and project delays (42%), as potential concerns over and above unforeseen tax bills (31%). The main concern is 77% of respondents are currently finding it difficult to hire and access the flexible workforce.

Accessing the flexible workforce is key for many sectors, enabling businesses to deliver projects on deadline and to grow as a business when required. Over the past year we have seen an incredible demand for all staff including temporary workers.

The Recruitment and Employment Confederation (REC) chief executive Neil Carberry said, “demand for staff is growing across every sector and region of the UK, and candidate availability is still falling.”

Candidate-driven market

The record number of vacancies is making this a candidate market. Contractors now have the luxury of choosing organisations that are able to show their IR35 compliance. According to HMRC’s own estimates, only around 33% of contractors should be determined as inside IR35. Despite this, 25% of businesses surveyed by Brookson Legal have taken a blanket approach to determine all contractors as working inside the new rules, with some incurring unnecessary employment taxes.

The same research revealed that 87% of respondents have been forced to increase contractor pay rates since April 2021, 75% by 10% or more.

While it is impossible to separate out the effects of a nationwide skills shortage from changes to tax legislation, the scale of this increase suggests that many companies may be increasing pay rates to compensate for employment taxes paid by contractors now found to be inside IR35.

Having a robust IR35 approach in place can ensure that all roles which should be outside of IR35 have the appropriate structure and contracts in place, helping organisations to recruit talented contractors needed to deliver post-pandemic growth.

Lessons to learn

With HMRC’s soft-landing for compliance ending in April, it is important that all parties in the supply chain, including businesses, agencies and contractors, learn from the last ten months and take steps to ensure that IR35 works properly. However, our research suggests that there are still some gaps in understanding.

For example, although 88% of respondents were confident that they understood requirements for reasonable care in making status determinations, 35% of companies asked contractors to make their own IR35 status assessments, something HMRC has been clear is not an acceptable practice.

To utilise IR35 as a force for good and ensure compliance, senior management need to have overall sight of their solution and ensure it is implemented correctly.

Forty-three percent of respondents said they have a better visibility of contractor workforce as a result of their IR35 solution. For businesses that have less visibility of their supply chain, HR teams could assist with this by ensuring that the IR35 solution put in place in April is still appropriate and that the IR35 status of new roles are determined prior to recruitment and included in job adverts.

Agencies and recruiters should also continue to liaise with their clients to give their guidance on the IR35 status of roles and encourage them to be clear in job adverts as to whether contracts sit inside or outside.

Mutual benefit

This has been a learning curve for all parties involved, but by working together to iron out the challenges it should be possible to find a way for IR35 to work for mutual benefit.

Dedicating time to implement IR35 correctly will allow businesses to increase their visibility of contractor workforces and allow them to engage with contractors working outside of IR35.

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IR35 has arguably been painted in a negative light for good reason, but it is not going away. By working together and taking responsibility for our part in the legislation, we can use IR35 as a force for good, boosting businesses and the economy towards success.

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Matt Fryer

Matt Fryer is MD at Brookson Group, a People2.0 company.

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