Statement of Work and IR35 – The Hidden Risk
IR35 legislation was originally introduced in 1999 to counter tax avoidance and ‘disguised employment’ through the use of Personal Service Companies. Since then, it has been down to the individual to determine whether or not you were ‘in scope’ of this legislation. However, in 2017 the responsibility for determining and deducting the correct amount of tax passed to the ‘engager’ (usually the end client) in the public sector.
As a result of these changes, many contractors actively avoid public sector contracts now. This has led to project delays and a severe drop in productivity. In a study by the CIPD and IPSE, 51% of public sector hiring managers believe they have lost skilled contractors because of April 2017’s changes to the IR35 rules; while nearly three-quarters were facing challenges in retaining their contractors. There are also still significant issues with the IR35 decision-making process, with a number of contractors challenging the decisions that classify them as ‘in scope’ in court and winning.
The Government claims that, to date, the changes in the public sector have raised £410m in revenue through improved compliance. With this in mind, it’s easy to understand why they are keen to introduce the same or similar changes to the private sector.
With the private sector consultation now complete, it’s expected that the Government will confirm whether the changes will be rolled out to the private sector in November 2018. And, if they are as keen to implement these changes as it appears, the amends could come into effect as soon as April 2019. The likely impact on the private sector, if the changes take place, are increased costs, reduced talent availability as contractors look for work that falls out of scope of IR35, increased frequency of fines for workers and employers, and potential damage to the employer brand.
All of this has been fairly well documented. And, whilst clients will no doubt be reviewing their ‘time and materials’ population, one category of contingent worker which is often missed is the Statement of Work (SoW) population. SoW workforces are likely to have a significant portion of workers (often up to 20%) who should instead be engaged on a time and materials basis. There are a number of reasons these workers may have been misclassified, including:
- Lack of training for the Hiring Manager around hiring practices
- Reduced organisational control over the SoW population
- Restrictive policies relating to the time and materials workforce.
SoW workers represent the greatest risk to organisational compliance, if changes are introduced to the private sector to reflect the public sector model.
In order to have a compliant workforce by April 2019, businesses will need to implement strategies to mitigate risk before the end of 2018, to allow time for requisitions to be approved, replacements to be found, and contractors to be converted to permanent employees. Failure to act promptly will lead to non-compliance and may expose the organisation to the risk of increased costs and liability for tax bills.
When it comes to SoW and IR35, one of the most important things to be aware of is that the HMRC’s assessment is based on what happens in reality. What is documented in the clauses written into SoWs will not protect clients by themselves.
Proactivity is therefore key to minimising the impact of IR35. Organisations who take no pre-emptive action are likely to see costs increase significantly when the legislation is put in place, running a significant risk of damaging their employer brand.
As the world’s leading workforce expert, we have a wealth of experience in managing SoWs and worker classification, as well as helping to build organisation-wide IR35 compliance strategies. If you would like support with any of the topics mentioned in this article, feel free to get in touch.