IR35 reform: what does it mean for the IT industry?

The 2018 Autumn Budget announcement confirmed that IR35 reform will be extended to the private sector. As an industry that readily hires contractors to fill skills gaps, we look at how the new legislation will affect IT companies and tech jobseekers.

What is IR35?

The IR35 legislation seeks to determine whether workers are contractors or employees of a company. 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 will be rolled out to the private sector too.

The legislation uses specific criteria to determine a workers’ status, including how much control the worker has over company practices and their working hours. The aim of IR35 is to reduce so-called ‘disguised employment’, where companies hire contractors who pay less tax when they should actually be employees.

What do these contracting changes mean for IT?

From April 2020, the private sector will become responsible for defining their workers’ status as employed or self-employed. Determinations will be made in the same way as the public sector. Companies in the IT industry will 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.

IT companies will need to ensure that they have thorough processes in place to effectively determine the employment status of their workers and avoid panicked determinations.

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.

On the other hand, although IR35 may see a reduction in the number of jobseekers seeking contracting roles, direct employment opportunities may increase.

Nonetheless, IT companies will need to plan how they’ll fill skills gaps in their workforce. We’d expect companies to focus on attracting young people by offering flexible working, ongoing training and graduate schemes. The future of tech recruitment lies in companies’ abilities to bridge the gap between experienced workers and younger millennials.

How can IT companies prepare

Companies can access 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.

By reviewing the employment status of individuals on a case-by-case basis, tech companies can ensure that all workers are being employed in the correct manner. By taking the time to become familiar with IR35 rules and employment contracts used by workers, companies can ensure compliance.

Perhaps most importantly, tech companies should start the evaluation process now and avoid making panicked determinations at the last minute.

How can IT contractors prepare for IR35 changes?

By the same account, IT contractors can also take the IR35 Test to determine their employment status.

Contractors can also prepare by learning from the mistakes of others. Contract Umbrella highlighted a recent case of an IT contractor who was left with a bill for unpaid taxes, national insurance contributions and penalties totalling £141,000.

Contractors who find that they’re inside IR35 should arrange to speak to their accountant to discuss their financial status and tax implications.

They should also review their current employment contract to see what working practices are expected of them. In some cases, changing the scope of working practices can help contractors pass the test. Before agreeing on any changes, it’s advised that contractors seek legal advice.

In the event of being subject to a tax investigation, contractors should ensure that they have appropriate insurance to cover the cost of legal advice and counselling.

The introduction of IR35 to the private sector may lead to a further skills gap in the IT industry. We’d expect to see less demand for contractors in the industry but a possible increase in direct employment opportunities. From April 2020, IT companies will become responsible for defining their workers’ status as employed or self-employed and non-compliance will result in fines and tax paybacks. Similarly, contractors will need to ensure that they have relevant insurance in place and have access to legal advice should they need it. By learning from the mistakes of others and starting the evaluation process early, the IT industry as a whole can ensure compliance to IR35.