Changes to tax rules for contractors in the UK, known as IR35, are set to have a big effect on the UK job market – in particular the tech and digital sectors, where contract work is particularly prevalent.

The changes were originally due to come into force in April 2020, but they were delayed because of Covid-19. Now, it looks as though there’s no chance the changes will be delayed again, and businesses will need to get ready by 6 April this year.

We’ve prepared a guide outlining the process employers will need to go through to decide how they should arrange tax affairs for contractors.

Commercial effects

A 2019 study by Brookson Legal, a law firm that specialises in IR35 advice, found that businesses might have to take proactive steps to avoid a “brain drain”. The big takeaway from that survey is that three in five skilled UK contractors said that, if a business that had hired them for contracting work decided that they were caught by the new IR35 rules — and therefore had to be considered full-time staff — they would consider going elsewhere.

However, things have changed somewhat since then. The Covid-19 pandemic has upended the way we work, and what employers want in terms of tax liability and employee flexibility, according to analysis by accounting and consultancy firm Grant Thornton.

Grant Thornton director Matt Parfitt argued that the Covid-19 pandemic has forced businesses to “rethink” their approach to a flexible business. “There are some important, legitimate commercial reasons why contractors can be an invaluable option for resourcing projects and coronavirus has, perhaps, highlighted this,” Parfitt says.

One of the most notable effects of the changes to the IR35 rules – before they were delayed – was that many businesses who used contractors had shifted to a “blanket” approach, deeming all contractors inside IR35 in order to avoid possible liabilities for getting the assessment wrong.

Others, meanwhile, cut right back on their use of contractors, opting to forgo their use in order to once again avoid liability, as well as the compliance and paperwork burden.

But, Parfitt says, this is likely the wrong way to go about it. Instead, he suggests, businesses should take the time to make the full assessment. There may be some cost associated with this, but this “could well be a far smaller cost in the long run than being either under-or over-compliant”, Parfitt says.

That means a hugely important part of the process is having the right processes in place for accurate and timely assessments – either in-house or with the help of external specialists.

Preparation

Another problem picked up by Brookson’s 2019 survey was a “lack of trust” among contractors that hiring businesses would have been able to manage their new responsibilities under the law.

And only 3% of contractors said at the time that the private sector would be ready when the new rules were supposed to come into effect in April 2020, and less than a quarter trusted that their hirers would make the right assessment of their IR35 status, Brookson said.

The year’s delay has given businesses more time to prepare and understand the rules. However, most companies have had a pretty tough year – even if their business has remained strong, they’ve had to deal with the rigours of remote work and furlough in many cases.

And a new follow-up study by Brookson Legal has found that many contractors still don’t believe the organisations they engage with properly understand the rules, leading to a sense of nervousness and distrust.

Talent Processes

Looking at it from another angle, 80% of surveyed contractors said they are more likely to work with a company that advertises roles that are outside of the IR35 rules, and which has proper policies and procedures in place with regards to the new law.

“This suggests that the companies who do demonstrate reasonable care in making their assessments could have a competitive advantage when it comes to attracting talent,” Brookson says.

Brooksons managing director, Joe Tully, said: “The fact that 59% of contractors would consider moving to another business if found to be inside IR35 shows how important it will be to get these complex assessments right. The outcomes will not only impact contractors’ way of life, they have operational and financial consequences for businesses too.”

It’s clear, then: hiring contractors in the IT industry is set to change. Recruitment experts like those at Redcat Digital can help guide you through that process — so get in touch now.

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