By Darren Ham, Director, Professional Services Delivery at CANCOM UK&I
IR35 may have been a term that you’ve heard a lot recently, particularly with regards to flexible resourcing. While IR35 legislation has, in fact, been around for over 20 years, changes implemented in April have turned heads and left many businesses and contractors in tech and other sectors confused.
The changes surrounding just who is responsible for tax under IR35 has led to many businesses urgently wondering how they can resolve the issue of short-term staffing requirements, while ensuring that they don’t fall foul of new tax rules. In fact, from a survey of 1,500 business owners, four in ten (41%) are planning to review their use of contractors and even potentially drop them because of the changes. But what do businesses need to know about IR35, and how can they still secure short-term talent while still being compliant?
What is IR35?
Originally, IR35 legislation was introduced to help tackle tax avoidance through ‘disguised employment’, where there was hardly any difference between a contractor and an employee. The distinction of this was left to the contractor rather than the business, leaving little for the employer to consider. As of 2021, however, new changes were set in motion. Now, it is the employer who must decide whether a contractor is, in fact, under IR35 for contracted work and fill in a ‘status determination statement’ to back up their reasoning.
The decision essentially determines how tax is paid if someone is inside IR35. If a contract employee is working as a permanent employee in a business, the employer is responsible for handling tax in the same way they are for permanent staff and ensuring it is paid correctly. However, if someone is outside IR35, the contractor is responsible for their own taxes. While this seems simple enough in practice, understanding if someone is working within IR35 is more challenging.
There are some key elements to examine when determining whether a contractor is inside or outside of the legislation. As a first port of call, consider the main factors of their day-to-day working life, such as where they’re based, who they report to, whether they have their own equipment, if there is an obligation for work, and if they are working as a substitute or replacing an existing employee – these factors must all be addressed when making the judgement call.
It’s not the end of short-term talent
Businesses working with contractors and freelancers should not stop just because of IR35, but they do need to ensure that they are well-informed and compliant with the new rules. One of the best ways to do this is to ensure they have a partnership with a business that understands individual companies’ needs, as well as the legislation details, and how IR35 impacts the organisation. It may be tempting for employers to turn away from using contractors due to an increased level of admin required, or a lack of understanding as to what is now expected of them, but this move could prove to be short-sighted and damaging when it comes to longer-term talent attraction. Especially given the benefits that flexible resourcing can provide – hiring specialist short-term expertise and temporarily increasing team numbers can provide the vital link to many projects being delivered successfully, and on time.
It’s a well-known fact that the UK is experiencing a significant shortage of workers, the worst since 1997, and those that are available may not have the skills that the tech sector in particular requires. A recent report from FutureDotNow highlights that 51% of the UK workforce does not have basic essential digital skills, such as connecting to Wi-Fi or setting up an email account. This lack of skills means that over 17 million people don’t have the required know-how for tech-based jobs, widening an already prevalent tech skills gap.
But there is talent out there; businesses just need to know where to look, even if that means looking beyond UK soil. Many international employees aren’t subject to IR35 in the same way as UK employees, and while having a physical presence close to these potential employees has in the past been a barrier to global talent utilisation, the greater adoption of remote working during the pandemic has opened up more possibilities. Accessing talent across the world also means a wider variety of skills becomes available, which may help UK businesses maintain their competitive edge – as long as the right tech is in place, to ensure that permanent and contract staff can work seamlessly together.
Not looking back, but looking forward
While the new IR35 regulations may have taken businesses by surprise, they don’t need to signal an end to working with tech talent on a shorter-term, flexible basis. By taking the right precautions, such as specific statements of work, and ensuring that they are up to date with the right processes, they can still take advantage of the benefits that flexible workers offer.
That said, while employers and contractors are still adjusting to IR35, one option is for businesses to outsource this process to a specialist partner – a partner who understands the skills they need, to ensure the work is done by someone who has the correct training and knowledge, as well as knowing how to tackle and navigate the complexities of IR35. This way, businesses can realise the benefits that flexible resourcing can bring in and continue to harness the power of specialised skills and expertise.