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Autumn Budget: IR35 in private sector more ‘foolhardy’ than ‘fair’

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The extension of IR35 regulation has quickly become a topic no business relying on a contract workforce can ignore

Financial secretary to the Treasury Mel Stride was quoted saying that extending IR35 regulation of contract workers from the public to the private sector was “a matter of fairness”, and that there had been “no evidence of significant impact on attrition rates of contractors working in the public sector”.

This has put the market on alert that the government will be applying the controversial changes to private sector businesses far sooner than many had hoped, and seemingly in complete disregard for the serious and ongoing impact it is having in the public sector.

The reaction from organisations close to the situation has been strong and largely uniform. The Association of Professional Staffing Companies (APSCo) predicted the move “will have a devastating impact on the flexible labour market”. The Association of Independent Professionals and the Self Employed (IPSE) has described HMRC as “in denial about the fallout from the public sector reforms”.

As a business that places hundreds of contractors with both public and private companies every year, we’ve been actively advising businesses about what to expect and how to react to the changes.

Expect higher contractor costs…

When the regulation was first applied we saw a widespread movement of contractors from public sector contracts to avoid the burdensome regulation. This ‘boom’ in available contractors may soon turn to ‘bust’, as the increased burden on clients and candidates evens out across markets. Businesses must plan for an increase in contractor rates, particularly from areas where the workers are highly-skilled and business-critical.

…and shorter contract lengths

IR35 puts additional burden on contractors to prove that they are ‘genuinely’ self-employed and not beholden to one employer. This will apply pressure on contractors to seek shorter contract times so they can engage with multiple clients. For major projects this will require businesses to consider alternative resourcing, and will potentially increase the onboarding of permanent staff.

Status questions are coming

One of the most perplexing challenges set by IR35 is making it the hiring business’s responsibility to determine the tax status of its specialist skilled workers. Beyond having to hire or train in the skills to make such an assessment, companies can reasonably expect that their contractors may not always agree with the status they are given – which may cause frustration and delays.

The ambition for an effective consultation on IR35 is to encourage the creation of a more effective and easier to apply set of ‘tax statuses’; placing greater burden for clarity and categorisation on HMRC where it rightly belongs.

Get more consultancy from your recruitment consultants

As these changes come in it’s understandable that businesses will be looking to their recruitment partners for answers, solutions and support. IR35 is bringing significant new challenges to recruitment companies as well, and will fundamentally alter how they can provide candidates and manage their contracts. IR35 adds the need for recruitment companies to administer tax deductions on behalf of HMRC, and provide reports on the earnings and company details of self-employed workers.

The pressures this will add to recruitment companies will have a significant impact on the business and operating models of many. The age of ‘pile them high’ placement is quickly coming to an end, creating the environment for experienced, innovative and consultancy-focused recruitment to return.

Much of the above is based on a ‘worst case’ scenario where the lessons of IR35’s painful implementation in the public sector go unlearned. However, there remains reason to be hopeful. We, along with a number of our peers and leading industry bodies, will remain active in petitioning HMRC and the Treasury to accept consultation and advice from those who are closest to the impacts of this regulation. We are also encouraging our clients to join our calls for a better, more effective set of rules.

A healthy, thriving, flexible workforce is essential to the UK. It’s imperative for all organisations to become aware of IR35, and take an active role in ensuring business is not robbed of the skills, flexibility and power of a thriving contractor environment.

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