What is the impact of the IR35 Private Sector Reform?

Kris Simpson explains IR35

“Others see it as an inconvenience but understand the reasons for the change and are open to working with the new reform.”

Depending on where you get your news from, will determine how you view this change to IR35. Certain groups feel this could lead to the end of the contracting market in the UK. Others see it as an inconvenience but understand the reasons for the working with the new reform.

As mentioned, in my last article, from April 2021 the client receiving the services from the PSC contractor will now be responsible for determining if the assignment can be performed by a PSC contractor.  Before I explain the impact let me give you an overview of the standard contracting structure.

A client identifies it has workload above the capacity of the current permanent headcount. They have 2 options at this stage:

  1. Hire a new permanent employee to take on this work
  2. Hire a contractor to take it on

Both options have benefits and drawbacks, but the challenge for the client is that the work may only be for a short period or for so specific it’s only required for this one project. Additionally, there are no guarantees the additional support will be required once the project ends. And due to this, they opt for a contractor as this allows the flexibility as the project requires it.

Now for 20 years (in the private sector at least), this has worked, the client would engage a contractor via their own PSC to complete the required tasks. This worked so well that flexible workforces have delivered some of the UK’s biggest projects in industries such as IT, Energy, Engineering, Banking, Insurance the list could go on.

Storslagna idéer är inget som skrämmer entreprenören. Ju galnare desto bättre!

The Impact and Risk

The crunch is that post-April lots of clients will not want the financial risk associated with engaging a PSC contractor and would prefer a contractor via a PAYE route. The impact of this could be massive, so lets look at the worst-case scenario.

Possible outcomes:

  • PSC contractors refuse to work via PAYE and massive infrastructure projects are forced into delays (HS2, Crossrail, Houses of Parliament Refurb!, rollout of 5G network)
  • Contractors agree to work via PAYE but only with a significant pay rise which increases the cost of delivery on specialist project and services.
  • The UK loses skills to overseas positions and weakens the UK’s ability to compete in the global market.

    Those are the worst-case scenarios and in reality, we will see some of the above but maybe not a massive scale. Away from the company bottom line, the impact is fully burdened on the PSC contractor. They will be forced to either not work or accept less NET income than they are used too (whether you agree with their current income or not, a pay cut is a pay cut and no one likes it!).

    Many organisations have conducted surveys with clients and contractors to try and ascertain how many PSC contractors will need to be transferred to PAYE. Some believe that can be as high as 80% could be captured,  others are more optimistic with 60%.

    I would in my experience place the figure somewhere around the 60%, this is due to longer serving contractors who have been with the same client for a significant number of years may struggle to prove their relationship is not closer to employment than a contract.

     

    “I don’t know, maybe HMRC’s sales pitch is off and its rubbing people up the wrong way.”

    Why us?

    Now, I must point out that the fundamentals of IR35 aren’t specifically a UK law. Albeit IR35 the name only exists in the UK, if you dig deep enough (and I did), you will find most of Europe has a similar rule set in place for engaging an independent contractor. Germany is the most well-known, however, the reasoning behind it seems very different.

    In Europe, the main driver for monitoring and managing who can operate as a PSC type contractor has focused on ensuring that all workers have access to Social Security benefits (unemployment help, medical care, retirement). Not tax evasion and as such the consensus on these rules are met with less hostility.

     

     I don’t know, maybe HMRC’s sales pitch is off and its rubbing people up the wrong way. Either way, IR35 Private Sector reform is coming and the impact will be felt by both client and contractor (OK, maybe a bit more by the contractor!).

    In my next article, I will discuss how a contractor or client can figure out if its inside or outside IR35, prepare to be confused!