March 2020 Budget planned - is IR35 still on the cards?
The Chancellor of the Exchequer, Sajid Javid, has announcing plans to hold his first Budget on 11th March 2020 - one month before the IR35 reform implementation on 6th April.
A review of the extension is going ahead too, concluding in mid-February, but could the March Budget announcement include IR35 being delayed?
We have already seen client companies view IR35 as a key risk for their business both from a financial and resourcing perspective. A nervousness is noticeable when reviewing IR35 requirements. Clients are also concerned that contractors or umbrella companies may increase their rates to compensate for loss of revenue.
IR35 is a massive shake up for the private sector, but despite the many papers analysing the impact of IR35, some of our clients are still unsure of the true level of risk they face. The Government review would have been welcomed by many, to ensure that the niche technical skills that the contractor market has for years provided continues to be a readily available source of expertise for the IT sector.
There’s going to be the biggest game of musical chairs in the contracting industry as every contractor tries to grab a seat with ‘outside IR35’ written on it. From April, their options will be limited. We could well see a more dramatic fall in the number of IT contractors this quarter and year. In those cases where the IR35 status of contractors is borderline, private sector organisations likely will err on the side of caution and refuse to engage those contractors off-payroll. Despite some of the claims being made, however, it seems unlikely that the rules will be the death knell of contracting.
Much will depend on whether HMRC takes tough enforcement action and publicly hauls an organisation over the coals. If that happens, it likely will have a chilling effect on the use of contractors. If enforcement action is not forthcoming, the impact of the reforms could be more limited.
The IR35 challenge need not mean the end of a flexible external test workforce though. There are solutions available to fit each organisation’s ongoing tactical and strategic resourcing needs. IR35 may, in many ways, streamline and add greater efficiency to future resourcing models.
The contractor market has for years provided a readily available source of expertise for the IT sector. It has provided niche technical skills, available for as long as the client requires and typically at short notice, thus supporting reactive as well as proactive resource demands. But if under IR35 the risk of using contractors outweighs these advantages, what are the alternatives available to organisations?
Consultancies and vendors are starting to provide a number of service alternatives to a traditional contractor solution which ensure that their customers are fully protected from IR35 risks.
A few examples include:
- A full Managed Service - the managed service approach suits those companies that require a strategic test partner which can be an ideal and low-risk vehicle for moving away from a large contractor-reliant model.
For the client, a Managed Service means they can outsource specific processes and functions with the objective of improving operations or reducing costs. The client and company are bound by the contractual service-level agreement which defines the performance and quality metrics of their relationship.
Another advantage of the Managed Service is knowledge retention. This is achieved through documentation to capture client system and business knowledge – a key advantage over the contractor model where any knowledge is lost upon completion of the contract.
- Graduate and Apprentice-based schemes – another option for an organisation is to ‘grow their own’. This focuses on building up a permanent internal test pool to replace the contractor model using graduates or apprentice-based schemes.
However, this approach comes with its own challenges with the added effort required to identify, employ, mentor and train ‘new blood’. There is where providers are training employees on the client’s site with support, mentoring and pastoral care. After an agreed period, typically twelve months, the client can then offer full time employment to the candidates, with no additional recruitment fees.
- Replicating the contractor model – a key advantage of the contractor model has always been the ability to rapidly take on and then remove additional test effort at very short notice. Although this might seem a challenge to replace using some form of permanent workforce, there are excellent effective and efficient solutions available at a much lower comparable cost than the contractor model.
An example is a Digital Test Hub which provides continuous on-demand low-cost testing service utilising teams based across the UK. Rates, which start at £210 per day are highly competitive against average contractor rates and are fully IR35-compliant. Service take-up can be achieved quickly and with the added flexibility of ramping the service up and down as demand requires.
In addition, there is no minimum or maximum team size – the client service dictates what is required, when it is required and the size of the team.