How will IR35 impact tech hiring in 2021 and beyond?

With less than 70 days to go until the new rules on IR35 come into play, there is still uncertainty around how it will impact the IT sector. Many companies are under fire for their approach to the legislation, insisting they will only engage with contractors through umbrella companies. 

In order for employers to be compliant, they need to review how they will work with contractors moving forward and determine what approach will work best for their business.

According to Contractor UK, almost six in ten contractors say end-clients have still not sent them ‘any communication’ about the new framework. What’s more, half of all contractors are yet to have their tax status assessed ahead of IR35 changes.

December 2020 saw almost half a million fewer self-employed people working in Britain than there were just three months before. This prompts the question of how the UK’s tech sector will be impacted moving forward, given that it relies on contractors to close the skills gaps.

The factors that determine IR35 status

When the legislation comes into effect, employers will become responsible for defining their workers’ status as employed or self-employed. Before this happens, companies need to carefully evaluate their employees’ employment status so as not to fall foul of the rules.

Both companies and contractors that fail to adhere to the regulations can be issued with fines and asked to pay back taxes. Nonetheless, the government gives many businesses cause for relief as they will not have to pay penalties for inaccuracies in the first 12 months relating to the off-payroll working rules, regardless of when the inaccuracies are identified, unless there’s evidence of deliberate non-compliance.

There are several factors that determine whether a worker is inside IR35 or not. The three main ones are:

1. Mutuality of obligation– is there an obligation for the contractor to do the work and is the employee obligated to pay them for the work?
2. The right of substitution– does the contractor have the right to name someone else (a substitute) to work in their place?
3. Supervision, direction and control– does the contractor work under their own supervision, or does the employer direct and control the work?

Further IR35 factors include:

• Financial risk– whether the contractor faces financial risk.
• Length of engagement – longer engagements are more likely to be inside IR35.
• Basis of payment– how is the contractor paid?
• The right of dismissal– does the contractor have the right to be dismissed? Part and parcel of the organisation – How involved is the contractor in the organisation?
• Employee benefits– what benefits does the contractor receive?
• Provision of equipment– whether the contractor provides their own equipment.
• The intention of the parties– did the employer and contractor intend on creating an employment contract?

 The risks and challenges for the IT sector

Several banks and insurers have already implemented policies not to engage with contractors in the lead up to IR35, with many workers now facing a future IR35 investigation. The IT sector faces a similar risk if a blanket ban on using contractors was to be imposed.

Many private sector contractors are likely to be told by their client company that they need to work as an off-payroll employee. Alternatively, it has been suggested that contractors could use umbrella companies, where they would be employed on temporary contract assignments.

However, this approach comes at an additional cost to both the employer and the contractor, and there’s also the issue of the employer’s National Insurance contributions being deducted as a result.

IT companies face the challenge of establishing thorough processes to determine their workers’ status. Failure to implement a process could lead to panicked determinations being made, as we’ve already seen in the banking sector.

In 2017, when enforcement was focused on the public sector, CWJobs hosted an event that explored the impact that IR35 could have on the IT industry. The principal takeaway from the roundtable was that many companies were concerned that IR35 in the private sector would lead to a further shortage of skills in the IT industry.

And that concern remains today. If IT contractors are deemed to be inside IR35, the UK tech sector could see its skills gap widening even further, undoing all the progress that has been made over the last few years.

Companies will therefore need to plan how they will find he necessary tech skills in their workforce. We’d expect companies to focus on attracting young people by offering flexible working, ongoing training and graduate schemes. However, this is a long-term strategy, which won’t address the immediate issue. Companies will also have to focus on upskilling their employees in a bid to fill specialist roles.

The necessity of IR35 legislation

The aim of IR35 is to reduce the so-called ‘disguised employment’, where companies hire contractors who pay less tax when they should actually be employees.

IR35 was first introduced in 2000 by the then chancellor, Gordon Brown. Reforms to IR35 in April 2017 focused on enforcement in the public sector and from April 2020, IR35 was set to be rolled out to the private sector too. However, due to Covid-19, the legislation was delayed until April 2021.

Given that the reason for postponement was to help the economy, the question remains whether its introduction is needed at all. It could be argued that IR35 will hinder the growth of many sectors, including tech.

Useful IR35 resources

Companies can prepare for IR35 by accessing a tool called CEST (Check Employment Status for Tax), also known as the ‘IR35 Test’, which aims to confirm how IR35 applies to individual contractors. The tool asks a series of questions relating to the duties of the worker and determines their status based on the answers.

• The Off-payroll working (IR35) detailed information page on the government website provides details on off-payroll information for employers and contractors.
• The Employment Status Manual on GOV.UK also provides detailed guidance and explanations of how the rules should be applied.
• For employers, CWJobs’ user-friendly CV Database can help companies find candidates that match their needs for both contracted and permanent roles.