Why businesses should keep contractors through IR35 regulations

by Heat Recruitment

IR35 regulations impacting the private sector are the cause of key changes to the workforce – with some companies re-evaluating their relationships with current contractors. Unfortunately, some of these changes have been executed on the back of confusion from what IR35 regulation actually demands.

A risk-free approach to IR35: the right solution or a step too far?

Already, banks such as Barclays, HSBC and Tesco Bank have informed contractors that they will continue to engage them if it is on a PAYE basis as an employee. Meanwhile, Lloyds Bank opted for the nuclear approach in its decision to fire all current contractors and close any opportunities to contractors in the future.

Naturally, the trend is influencing firms to follow suit, and contractors throughout the UK have revealed how some of the largest employers have forced upon them the ultimatum of either joining their workforce or quitting altogether. While organisations aren’t wrong to want to minimise liability by adopting this risk-free approach to compliance, it’s a strategy which is both wholly unnecessary and potentially self-destructive given the UK’s skills shortage.

What is IR35 and what does it mean for your business?

Dubbed as the biggest revenue raiser on the autumn 2018 budget, the introduction of IR35 to the private sector intended to clamp down on contractors operating in what HMRC describes as ‘disguised employment’ – that is to say, working off the payroll through an intermediary such as a limited company to circumvent the need to pay the tax rates due for contractors. Indeed, figures from the government’s own research predict that the change to how IR35 regulations are applied will generate an estimated £1.3bn a year by the 2023-24 financial year.

IR35 has already been the source of confusion to business leaders across the private sector who fear the only route to compliance is to employ contractors directly or let them go – and, according to research from Brookson Legal, the feeling is mutual for contractors. In a survey of more than 500 contractors that asked how they would respond if an employer found them to fall under IR35, three in five said they would seek alternative work with other businesses.

The key change prompting firms to take cover is the shift in liability. If a contract is deemed to fall inside IR35 regulations, then the fees paid to the contractor are deemed to be a salary, from which employee taxes should be deducted. Under IR35, it will be the responsibility of the hiring company to pay those taxes as opposed to the contractor’s limited company.

Retaining top talent while remaining compliant

Realistically, IR35 regulations shouldn’t prompt firms to push valuable talent away. On the contrary, regulations simply encourage leaders to ensure all working relationships with contractors are compliant by defining the status of the contractor against HMRC’s criteria for tax purposes. Their checklist includes whether that person can do the job and is there a right of substitution? How much control the employer has over the methods used by contractor to do the job and whether the company is obliged to offer the contractor work.

Surely, during a persistent talent shortage, a blanket-removal of all contractors is counter-productive to business growth and profitability. This in mind, the future workforce should not be about removing contractors for the sake of reducing risk but rather about assessing relationships, offering employment where necessary but retaining contracts that fall outside of IR35 to maintain productivity and retain the competitive edge.

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