Last reviewed 18 March 2021

As IR35 extends to the private sector, we look at what this means for businesses that will be recruiting (including those from outside the UK), and how they need to set-up their systems to manage anyone inside or outside of IR35.

With the completed rollout of IR35 across the public sector last year, 2021 sees the regulations expand to the private sector after a delay because of COVID-19. From April 2021, all businesses that engage third-party contractors for any kind or contingent worker will have to determine their working status for tax and National Insurance.

The critical factor to pay close attention to is that the determination of that working status moves from the individual or any personal service company they work through to the end-user business.

Where blanket determinations of working status had become commonplace, businesses must now pay close attention to individuals' working status. All existing workers that IR35 could impact must be assessed to clearly define whether they are inside or outside of IR35 rules.

Commenting, James Poyser, CEO of inniAccounts and founder of offpayroll.org.uk, an anonymous site where contractors can rate end clients on their fair approach to IR35, said: "IR35 will only become a challenge for organisations if they fail to embrace the spirit of IR35 and undertake fair, individual determinations.”

Poyser continued: “We can see from the comments on our website that many contractors are quick to walk away from organisations who adopt blanket bans, or role-based determinations. There's a challenge here for business: those contractors who are confident enough to walk away from unfair clients, are those who are the most valuable, know they will be able to find clients who value them.”

According to research from IPSE (The Association of Independent Professionals and the Self-Employed), over two-thirds (70%) of freelancers were worried about the impact of the changes. In contrast, among limited company directors, who are more likely to be affected by the changes, this rose to 88%.

Says Romanie Thomas, Founder of Juggle Jobs: “It is absolutely vital that the company, and the sole trader or consultant, are working together to remain honest, transparent and adhering to the law as it relates to paying taxes. For those working as flexible self-employed professionals, IR35 is not a worry. These individuals are working 2-3 days per week for one company, and sometimes in addition, one day per week for another company. This arrangement, where an individual’s provide expertise, is in effect, ‘business services’ is well within the spirit of IR35. Companies embracing outcome-based delivery over time are well within the regulations.”

Speaking to Croner-i, Tania Bowers, Legal Counsel and Head of Public Policy for the Association of Professional Staffing Companies (APSCo), explained the challenges business face: "Those sectors that are heavily reliant on contract professionals or struggling with skills shortages – STEM and IT generally for example – will be more adversely impacted than others. They are also facing the challenge of losing access to EU highly skilled flexible talent under the new points-based visa system. However, the government did announce a new "elite" visa in the budget which won't require a job offer, something APSCo has been calling for since Brexit.”

Inside knowledge

Croner-i: Business-inform spoke with Colin Morley, Director at Hays and began by asking how disruptive will IR35 be to their ability to locate and hire the staff they need?

"The reforms present a significant administrative burden to employers and distraction for companies at a time when teams have been cut, and the focus should be on a return to growth. There is a significant risk that employers will make blanket in-scope determinations to avoid the reforms' administrative burden. There is also the potential for any appeals to create an additional burden for employers.

“We know from recent research that if an assignment is determined to be in-scope of IR35, almost half (46%) of contractors plan to look for a permanent job (according to Hays Career Insights Survey Oct/Nov 2020). This will be a loss to the flexible workforce and given that unemployment is rising these workers won’t all be able to switch straight into permanent roles, which is likely to further contribute to rising unemployment.”

What changes must businesses make to their recruiting processes to remain fully compliant with IR35?

“When deciding how you will approach the reforms to IR35 legislation, here are some of our recommendations.

  • Take a balanced view – the rules for determining IR35 status have not changed, and many roles could remain out-of-scope of IR35.

  • Take time to understand the new rules – PSC workers can still be utilised for PSC assignments and may be the best option for your organisation, depending on the project. Understanding the rules means you will always be able to access crucial PSC talent as and when you need to.

  • Protect yourself from risk – if you haven't already, the time is now to implement appropriate processes to determine if roles are in or out of the scope of IR35.

  • Audit your recruitment partners – before the 6th of April, make sure your recruitment partners are familiar with the reforms and demonstrate they are following the correct procedures.

  • Act now – for now, the government seem set on bringing these changes into effect this April, which is now just around the corner. Take action now to ensure you’re ready for the changes.”

Many businesses have come to rely upon the use of freelancers and contractors. Will many smaller enterprises stop using these workers altogether?

“Close to a fifth (17%) of private sector organisations say they have previously implemented a personal service company (PSC) ban in response to the original IR35 private sector reforms date. 60% say this ban is still in place, whilst 32% reversed this decision when the delay to the reforms took place. Speaking now, there are some organisations who are continuing with blanket bans.”

Are there certain sectors that will be adversely impacted by IR35, such as science and engineering?

“Industries typically associated with utilising contractors are areas such as technology and finance, however the IR35 reforms will touch all sectors that employ contractors – so employers do need to take notice before the reforms come into effect.”

What do you think the future of employment under IR35 looks like?

“We expect to see a permanent change in the skilled contingent market as a result, however it can’t be solely attributed to IR35. COVID-19 and Brexit have also played their part. We’re confident that companies will evolve how they engage with skilled contingent workers, particularly in the technology and engineering sector for example. This will see contractors being used more strategically to deliver specific outcomes.”

The impact of IR35, as APSCo’s Tania Bowers concludes, will be determined by current business practices and individual enterprises need for new talent. “If we look back at the roll out of IR35 into the public sector and the impact this had on recruitment processes, we do expect to see recruiters and employers beginning to specify if a role is inside IR35 in job adverts, which will certainly provide some clarity for the contractor employment market.

“It is unlikely that Off Payroll will stop businesses of any size from engaging independent contractors in the longer term. Instead, we expect the recruitment and deployment of these individuals to be more structured, which will in turn lead to an increase in project style delivery across organisations.”

All businesses understand that their human capital is their most precious asset. IR35 is certainly more bureaucracy to manage. However, enterprises that rely upon contractors and the freelance sector can't ignore IR35.

With proper procedures in place and a clear assessment process (don't forget you must have a dispute process as well to manage any worker that disagrees with their determined status), IR35 can be placed within your company's recruitment systems to ensure your full compliance.