Our view on the impending IR35 changes
We’ve been here before – IR35 changes that look set to change the IT industry significantly. In the past these changes have had little impact as IT providers, contractors and agencies make small changes to adapt but fundamentally retain the same model. I may eat these words, but the changes due to come into effect from 6th April 2021 feel like they may fundamentally change the status quo. This blog explores the changing landscape.
Introduction
These changes were due to come into force in April 2020 but were deferred a year due to Coronavirus.In this blog, we don’t cover the changes in detail (there are some great guides online at: https://www.taylorhopkinson.com/ir35/#postponed https://www.pinsentmasons.com/out-law/guides/ir35-the-basics https://www.bdo.co.uk/en-gb/plugdin/insights/how-will-ir35-change-in-2021 ) and HMRC have lots of details too: https://www.gov.uk/guidance/fee-payer-responsibilities-under-the-off-payroll-working-rules and https://www.gov.uk/guidance/april-2020-changes-to-off-payroll-working-for-intermediaries
Instead, we explore the changes we are seeing in the marketplace as the changes loom.
Changes for Agencies
Agencies look ‘squeezed’ by the new legislation.On one side, Umbrella companies are looking to mop up contractors en masse by providing payroll services to ‘inside IR35’ contractors.On the other, IT providers are moving from providing just bodies to providing a managed or fixed price service to work around IR35.
We are seeing lots of agencies either:
- Offering payroll services themselves – effectively making them a combined agency (ie source of good contractors) and umbrella company meaning that end clients only need to use one company rather than two for each engagement; and/or
- Looking to offer fixed price / Scope of Work based services themselves.
Regarding the latter, in theory this sounds like a nice pivot but, in practice:
- Agencies have no experience specifying a fixed price project or service.This is often challenging and time consuming to get right – and if you don’t get it right, you end up owning a significant delivery risk.Specifying a fixed price project requires skilled resources and the Client will usually expect this to be delivered as pre-sales, another challenge for Agencies who aren’t used to this stage of an engagement.
- Agencies have no experience delivering a fixed price project or service.Who is going to be project manager?Asking the delivery contractor to do this is unlikely to work and there is no additional fee to fund a PM to manage the engagement.
- Agencies have no experience managing change during a fixed price project.This is a fundamental part of managing a project and if this is not done (or is done badly) then this exposes the agency to significant risk.
- Some agencies are expecting to pass on the whole delivery risk to the contractors themselves.This has a number of challenges:
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- The contractor is very unlikely to continue to do the same kind of work, for the same money but own a delivery outcome rather than providing services on a time and material basis.They would be mad to do that, of course.
- The agency carries residual risk under a number of scenarios still.As an example, what happens if the contractor folds his contracting company and walks away? The Agency still has a fixed price project to deliver for the client with no resource to do it.Failure to complete the project would be a potential breach of contract.
Changes for IT Providers
Most IT Providers deliver services via both fixed price and time and material engagements, usually determined by the Clients preference.These services can be delivered by full time employees or contractors.
Of these permutations, the impending IR35 change will only impact T&M engagements delivered by contractors.We are therefore seeing IT Providers try to either:
- Move Contractors into permanent roles.Clearly this has a tax / income impact on the Contractor and a resource flexibility impact to the IT Provider.
- Wrap the current T&M services into a ‘managed service’.There are two fundamental issues here:
- Selling a managed service is very different to selling a T&M engagement from both the Client and IT Providers perspective.Doing this right (ie in a way that puts the workers outside of IR35 and doesn’t introduce significant risk to the IT Provider) is non-trivial and many IT Providers will be ill-equipped to make this change.
- This only shifts the IR35 challenge, it doesn’t solve it entirely.By turning one or more contractors into a managed service you move the IR35 obligations and risk from the end client to the IT Provider.I suspect many IT Providers are unwittingly creating a huge IR35 risk for themselves as a result.
Changes for Contractors / PSCs
We’ve includes Contractors (and their Personal Service Companies) last because in some way, the impact here is largely a function of the changes detailed above:
- Contractors no longer own the IR35 risk if HMRC determines that they should be inside of IR35.This feels like a win, but the obligation to determine if an engagement is inside / outside of IR35 is now undertaken by the Client rather than Contractor – the Client is much more likely to be risk adverse then Contractors.
- A number of Clients are stating they will simply not use contractors in the future as they don’t want to own the risk.
- Pressure to move to a permanent employee role.
Summary
Previous attempts by HMRC to eradicate the use of PSCs has been, at best, moderately successful – Contractors and their accountants have been swift to adapt, to take on insurance to mitigate the risk, to shift working practices and contracts slightly to stay the right side of IR35.
Shifting the IR35 risk and determination obligation to the end client under the new rules may mean that the rules have more impact though.It will be an interesting few months!
At Forge Technologies, we have a wealth of experiencing in specifying and delivering both fixed price projects and managed services in a balanced, fair and risk managed manner.If you are an end client or an agency looking to migrate T&M contractors to either a project or service then please get in touch.
