IR35 – preparing for what’s next

With changes to IR35 set to go into effect in April 2017, the private sector can take lessons from the public sector approach, to stay ahead of potential future changes that could impact them.

Let’s take a closer look at the upcoming changes, the business risks involved, and the steps organisations can take to prepare for its impact.

What are the upcoming changes and what is the objective of the changes?

The main change to IR35 proposed by the Government is to shift the responsibility of ensuring individuals are paying the right tax to the entity paying the personal service company (PSC) (‘the fee payer’). The objective is to make it harder for individuals to falsely operate as a PSC in order to reduce their tax liabilities.

Who will be affected by the legislation?

For this round of changes, the legislation will apply in any instance where the end client is a public sector body. So, whether you’re a public sector body who works with contractors or a third party organisation who provides contractor support to the public sector, you need to pay close attention to the changes and how they might impact your organisation.

The changes will not impact private sector ‘engagers’ at this point, providing that they are not supplying contractors to the public sector. It is our belief, however, that similar provisions will be rolled out to the private sector in the future.

For those private sector clients who are providing services to the public sector, the position is a bit less clear. According to the legislation, if the private sector entity is clearly providing outsourced services, then the PSCs they use to deliver that will be deemed out of scope. However, it will require a case-by-case basis review of the contract that the private sector entity has with the end public sector client to make that final decision.

What are the risks employers should be aware of?

The Government estimates that only circa 10% of PSCs are currently complying correctly with the intermediaries legislation. As such, the application of the proposed legislation carries significant risk of disruption to businesses using PSC workers to deliver services into the public sector. Several of the keys areas employers should consider are:

Continuity of service
The Association of Independent Professionals and the Self-Employed (IPSE) suggest that 54% of the 26,000 PSCs currently providing services into the public sector will seek to stop providing those services if the engager is permitted to deduct tax and National Insurance Contributions (NICs) on their behalf.

PSCs will inevitably seek opportunities in the private sector to avoid the legislation, not only disrupting in-flight public sector projects, but also driving up rates in the public sector through deemed risk premiums.

The risk of ‘brain drain’ in the public sector and organisations that primarily work with the public sector is significant. This may cause a number of projects to be severely affected until they can find talent willing and able to work in this capacity.

We anticipate that the majority of engagers will take a cautious approach and determine as default that the PSCs are in scope and, therefore, deduct tax and NICs at source.

Failure to attract top resources
Unless a clear strategy is in place to continue the use of PSCs on existing terms, clients risk losing resource to competitors/less risky projects. As no one party in the contracting chain will have all of the information to make the decision, with regard to the services being carried out by a PSC worker, a clear process will need to be agreed to facilitate the review process and prevent losing resources through delays.

Cost increases
It’s important to remain aware of potential cost implications. For example, Deloitte has estimated that the average reduction in net pay to a PSC would be 13%. And IPSE predicts 40% of public sector PSCs will seek an increase in their rates to compensate for any additional tax liabilities.

How can organisations prepare for changes to IR35 to mitigate the risks and optimise their use of talent in the long term?

There are already a number of options that organisations should consider deploying now in order to mitigate some of the potential risks.

Employed consultants
As payrolled employees (employed permanently by an external agency), Employed Consultants (ECs) are already outside of the scope of the new legislation and, therefore, would represent a steady investment for any project – as well as the cost savings and flexibility ECs can already offer to organisations. ECs could either replace your existing contingent workforce, or your existing contractors may consider becoming ECs.

Statement of work projects
If developed correctly, deliverable or outcome-based solutions will ensure that all PSC work can meet IR35-compliant requirements.

Managed service
If organisations have a significant number of contractors, the likelihood is that the new regulations will significantly increase the time required to process these individuals, as well as increasing financial risk for an organisation. By implementing a Managed Service, employers can avoid this by transferring all of the administration and risk to a master vendor. In addition, this model will also create a standardised application of the new regulations. This will prevent discrepancies in the supply chain which could produce significant reputational and logistical risk if left unchecked.

Experis is committed to helping smooth the process as companies prepare for the IR35 changes. We are working closely with our clients on an individual basis to understand the true nature of the services being provided; the most effective channel in which to provide them; and then working with them to proactively communicate options to their PSC base.

This article first appeared in the sixth edition of The Human Age newspaper.