One of the news items that’s been bubbling around for a some time is the impact of incoming changes to the interpretation of IR35 legislation.
This has been billed as an attack on ‘White Van Man’ but the impact of a tightening of the interpretation of IR35 legislation in the UK is having a significant effect on the IT sector. Although there was a U-turn on some of the assault on self-employed people from the government, it has left behind a change in the approach and interpretation of IR35.
If you are not aware of IR35, it is something that affects people who work as contractors in many sectors, especially in the IT sector. These people are self-employed and will often work under a single person limited company, known as a Personal Service Company. A common practice in this space is to pay yourself minimum wage and then take large dividends from the company as the sole shareholder, at the end of the year. Because of the way UK tax is structured this attracts significantly less tax (Income Tax and National Insurance) than PAYE for regular employees. It is a very tax efficient way to work.
The problem is that some contractors have been working in organisations for many years, charging a day rate and coming into work every day, sometimes using the company’s tech just like a regular employee. These people don’t get paid holiday and the organisation has far fewer responsibilities (like benefits and pensions etc) in relation to these contractors. The price the organisation pays is often a significantly higher daily rate of pay to the contractor than would be commanded by an employee. This increase in daily rate covers the benefits that they would normally enjoy and the risk associated with potentially being the first people laid off it there are budget cuts – they have no job security.
Unfortunately, because of the situation with these contractors looking and mostly behaving just like regular employees there is concern in HMRC that these people are actually ‘disguised employees’. The contractor pays less tax to the Revenue and the organisation doesn’t pay National Insurance at the same rate that they would for a similarly skilled employee.
In good times this hasn’t been seen as a big issue – these people are entrepreneurial and taking a risk in return for higher reward. The problem is these are times of austerity in the UK, when tax receipts are at risk. As a result the HMRC are looking for additional revenue. It has been estimated that IR35 abuse is causing a loss in tax revenue of nearly half a billion pounds per year. This simply cannot be ignored when there is a view that ‘every tax dollar counts’.
The first bodies who are shedding day-rate contractors are public sector. They have to be seen to be whiter than white and, in many situations, have employed quite high numbers of contractors on open-ended day rate contracts. Budget pressures and the threat of the impact of being caught with disguised employees means some public sector organisations have very quickly shed their contractors.
What does this mean for organisations who have terminated contractors at short notice? One word: disruption. People who were doing skilled jobs, administering business critical systems just disappear overnight. Previously well-kept systems suddenly don’t have someone who understands the ins and outs of that solution – in the worst situations there is literally a rudderless ship.
There are a couple of options open to budget-holders at this point:
1. Employ a replacement on a permanent contract
2. Contract with a service provider to replace the service delivered by the previous contractor
Although the ‘simple’ route may appear to be employing a permanent staff member, specialists can be tough to recruit and retain. Recruitment costs can also be high and the cost to site the new employee (after on-boarding costs) also need to be considered. Contracting with a service provider removes all this uncertainty and can get a service delivered within days, not months. Your organisation agrees the service required and service level agreement (call it a job specification) and then it is up to the service provider to deliver on this.
In the case of Silverstring, our service gives you access to a range of specialist personnel, who deal with our subject matter every day (and in some contracts provide 24/7 support for the service). Our specialists have access to dedicated resources to support precisely the service which you contract with us for – data protection, storage management, cloud deployment and management. We have automation tools to reduce the manual work individual personnel often do. Often this service can be provided at the same, or lower cost than employing specialist contractors to do the same job.
All of this means you should get a better service:
- Assurance of the service delivery
- Control over delivery according to your contract
- Access to the latest developments
- No worries about holiday or sick cover
- Removal of the risk of disguised employees and the potential costs such personnel might incur, if HMRC come knocking.
If you would like to discuss your requirements to replace contractors, don’t hesitate to contact us – our customers will confirm the service is great and the value of the service might just make the choice a very simple one.