IR35 and contract work in the tech space – where are we now?

After being delayed for a year, IR35 legislation came into effect on the 1^st April 2021. With uncertainty over how it would impact both tech workers and companies, a year later, the industry is in flux.

According to recent research from IR35 consultancy, Kingsbridge, an increasing number of contractors are unwilling to take inside IR35 roles, which is further widening the tech skills shortage.

The consultancy found that 21% of contractors who received an ‘inside’ status determination left to find an ‘outside’ role. What’s more, 60% of survey respondents said that they planned to seek ‘outside’ IR35 roles in the coming months.

When the legislation came into effect, many organisations rolled out a blanket ban on contracted workers to avoid any incorrect status determinations and consequential penalties. However, many industries, including tech, are relying on contracted workers now more than ever to fill their skills gaps.

Consequently, Kingsbridge also reports that over 40% of respondents who were ‘inside’ IR35 legislation increased their day rate by at least 10%. As a result, many industries are finding it more expensive to continue hiring for specialist skills.

Certainly, at CWJobs, we’ve noticed a significant increase in tech job adverts that reference IR35. Across the UK market in February 2022, 4.7% of job ads mentioned the legislation. Whereas, on our tech jobs platform, 12.9% of adverts referenced IR35, showing how important an issue it has become for tech recruiters.

Strategic partnerships over individual talent

The increased demand for tech skills during the pandemic saw many companies turn to contractors to manage their IT infrastructure. Now that IR35 has taken effect, we’d expect to see companies struggle to secure the specialist skills they need to continue their digital transformation. As a result, many IT projects will need to be put on hold.

This was certainly the case when IR35 was first introduced to the public sector in 2017. Research by Contractor Calculator revealed that 79% of public sector IT projects were delayed after IR35 due to contractors leaving. One quarter of government IT projects were at risk, including the Home Office’s £341m Digital Services and Border Programme, and HMRC’s £220m digitalisation of tax for business plans.

As more contractors are found to be inside IR35 legislation, we’d expect to see an increasing number of tech workers leave their contracted positions. For many contractors, one of the biggest benefits of working in the tech sector is the flexibility that comes with being able to contract with companies.

As organisations are forced to reclassify their tech roles, we’d expect to see more businesses move away from hiring contractors in favour of seeking out tech partnerships with corporate providers.

Rather than filling skills gaps with individual talent, companies will look to partner with limited companies that can provide outsourced teams that scale with the needs of the business. In turn, this will (in theory) avoid concerns over IR35 as companies will be engaging with partners with full-time employees and a management structure.

False IR35 workarounds

Although many companies are seeking out strategic partnerships with limited companies, and working with overseas talent, in August 2021, HMRC released an Employer Bulletin warning that such workarounds may not always be compliant.

Under the terms of IR35, organisations still need to assess the tax status of every individual contractor they work with to determine if they should be salaried workers, or if they can be treated as off-payroll employees.

Companies that fail to take reasonable steps in determining the status of their partnership workers will still be held accountable in the future and liable to pay each worker’s income tax and national insurance liabilities.

As such, companies are likely to find it even more challenging to find tech talent moving forward, without providing in-house training to their own staff.

Upskilling and retraining employees to meet demand

In our previous update on IR35, we predicted that companies would start to upskill their existing employees to meet demand for specialist tech skills and avoid outsourcing to contracted workers. This also aligns with research from the World Economic Forum (WEF) reports that, as technology evolves, 50% of all employees will need reskilling by 2025.

Rather than outsourcing for tech skills, we’ll likely see companies invest closer to home by providing tech-focused learning and development for existing staff. In turn, this can help future-proof businesses by training people from the ground up.

It can also help companies retain talent. Our Tackling Tech Training research shows that almost all tech workers say they value training throughout their careers, and over two thirds (67%) say that training needs to be regularly refreshed. To retain talent, employers need to provide training opportunities at every stage of the career path.

Our research also finds that 66% of tech workers say that technologies and training can become out of date quickly in today’s modern world. Companies therefore, need to ensure that training materials are relevant for today’s workforce. This is particularly important at the moment, as companies are still relying on for remote training as well as daily operations.

How IR35 is changing the wider business landscape

According to Contractor UK, one third of contractors are currently engaged on contracts ‘out of scope’ of IR35, which shows that companies are embracing workarounds to fill their skills gaps.

Indeed, many workers seek the flexibility and lifestyle benefits that comes with being an off-payroll employee, and Contractor UK also finds that 80% of contractors that have been determined as inside IR35 are now looking for a new client.

What’s more, research from the HR Director reveals that 50% of contractors plan on challenging an inside IR35 determination. In turn, this could create a lot of additional work for employers if disputes arise, which could lead to more companies embracing a blanket ban on contractors. Advice for employers recruiting tech candidates

There is still some uncertainty over what the future will hold for tech hiring regarding IR35. In the meantime, employers should identify all workers that provide services as contractors, or limited companies, and determine whether they should be classified as inside or outside of IR35 legislation.

If contracting overseas, employers should check if they qualify for exemptions for clients who are ‘wholly overseas’, or those who receive a ‘fully contracted out’ service.

Longer-term, employers should focus on developing tech training programmes to upskill existing employees. Likewise, learning and development opportunities can help attract the next generation of tech workers, who are looking for apprenticeships, on-the-job training, and graduate schemes.

In the short-term, recruiters can attract tech candidates by stating on job adverts if roles are outside IR35. At CWJobs, we’ve noticed an increasing number of companies making candidates aware of the IR35 status of roles up front. For example, 4.7% of the job adverts posted on our platform mention the phrase ‘outside IR35’, compared to 1.5% across the UK market.