How tech businesses should prepare for IR35 following the 12-month delay

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The role of freelancers, contractors and interim workers just became that much more important to the tech industry. The economic rollercoaster of the coronavirus has forced companies to pivot business models at unprecedented speed – either to meet an almost unmanageable need for their services or to restructure and adapt in line with a drop-off in sales. Both scenarios mean that tech companies need skilled people immediately, and in most cases that means turning to the UK’s pool of independent workers.

The delay to IR35 has made this task that much easier. Without the added complexity to hiring processes or the financial disincentive to certain roles, tech companies can access talent with relative ease. However, the delay to the legislation will only last until April 2021.

To ensure they continue to have access to the most talented independent professionals, these are some of the practical steps tech companies should take over the next 12 months to prepare for IR35 when it does land:

Ensure hiring managers understand the difference between 'inside' and 'outside' IR35 roles

Private companies do not currently need to determine the IR35 status of roles. However, when IR35 comes into effect next year, they will have the legal responsibility for deciding which roles are ‘inside’ (NI and PAYE tax-deductible) or ‘outside’ of IR35.

There are three core principles to determine whether a role is either inside or outside of IR35. If a contractor is in a role that could be carried out by someone else with similar skills then that role falls outside of IR35 (the right of substitution). The roll also falls outside of IR35 if the contractor is not being delegated tasks on a daily basis by their client (supervision and control). If the client provides the contractor with a brief to complete a specific project but is not obligated to provide them with further work (and the contractor is not obligated to accept further work), then the role falls outside of IR35 (mutuality of obligation). A contractor only needs to meet one of these requirements for the role to fall outside of IR35.

For example, a programme director might be hired to plan and lead multiple project workstreams to implement a major enterprise software platform. The role would fall outside of IR35, if she could demonstrate that the skills required for the role could be found in another professional with similar experience that she could put forward. If, like many project-based roles, she was given a long-term objective to meet, but not explicitly told how to meet it, then the role would fall outside of IR35. Likewise, the role would also fall outside of IR35, if the work she was conducting meant she could operate independently on a daily basis, without being delegated to. It’s key here to not only have the right contracts in place but also the right governance processes to ensure management by objectives rather than day to day output.

Implement an individual status assessment process

A number of tech companies recently received a lot of criticism for lumping all of their contractors (some of which had over 3000) into the inside IR35 category, despite many of these roles being viewed by tax advisors as outside of the legislation. It meant that many of those contractors would have been unfairly classed as employees for tax purposes – with NI and PAYE deductions made to their earnings without the benefits of being an employee of the company. This effectively blacklisted them from the UK’s independent talent pool.

With a number of sites emerging calling out perceived unfair IR35 practices, tech companies need to ensure they have an individual assessment process for roles, rather than enforcing blanket statuses. This will be particularly important for securing talent next year, when the country may be in a post-coronavirus upswing and companies will once again be pivoting to meet a new market landscape.

It is the contractor’s responsibility to pay the employee National Insurance and income tax if the role they are in is deemed inside of IR35 (but the company’s responsibility to determine the IR35 status of the role). Whilst this does relinquish payroll and accounts teams of the tax-reduction responsibility for inside IR35 roles, they (and hiring managers) should have an understanding of this area. 

If a contractor has been hired via a recruitment consultancy, then it is the agency’s responsibility to make the contractor’s tax deductions. Some recruitment agencies are offering candidates that fall inside the legislation the option to join their payroll. By putting the contractor on an agency’s payroll for the duration of the assignment, the agency pays HMRC employer’s NI and the apprenticeship levy on behalf of the hiring organisation. This will be in addition to the agency fees charged to the client.

It is the same if a contractor is operating through an umbrella company; the umbrella company is responsible for paying the relevant taxes. Some contractors (particularly at more senior levels) have their own limited company that processes the full payment for the assignment. Generally, they’ll use an accountant to pay out the necessary tax deductions.

Tech companies should not view IR35 as a hindrance to hiring independent workers. In fact, it can and should be used strategically – for example, by offering the contingent workforce the same benefits as employees for inside IR35 roles. By implementing it fairly, communicating it well and incorporating it into the company’s talent strategy, tech companies will find themselves accessing the best talent the market has to offer.

Paul Wright is Head of the Technology Practice at Odgers Interim

Paul Wright

Paul Wright is Head of Technology at Odgers Interim. He has been leading the interim practice across the technology sector focused on B2B providers of hardware, enterprise software & IT services, Consumer Technology, Digital Platforms & Telecoms and Growth/private equity investors in technology.

Odgers Interim is the interim management talent solutions arm of Odgers Berndtson. Together, they are both the UK's number one executive search firm and the largest interim management talent solutions provider.