07 Dec 2017 by Sadie Burgess
At Budget 2016, the government announced some changes to the infamous IR35 legislation – the rules and guidance surrounding tax for contractors or personal service companies (PSCs). In a nutshell, the liability to pay correct employment tax will move from the contractor to the client. The big surprise however is that these changes, which will take effect in April 2017, will only affect contractors working for public sector clients. Whilst the legislation applies to all types of contractors, public sector organisations should give particular consideration to the most common contractors they work with – software developers.
What Exactly is IR35 Legislation?
IR35 legislation is essentially a legal framework aimed at preventing ‘disguised employees’ from minimising tax and national insurance contributions by setting up limited companies. It was named after the ‘Inland Revenue 35’ leaflet which introduced the change back in 2000 and has progressively evolved to try and stamp out tax avoidance.
The legislation has been around for over 15 years now but the major revelation from Budget 2016 was that there is a major shake-up on the horizon and it is the public sector that should take note. From April next year, Government proposes to make public sector organisations responsible for operating the tax rules that apply to off-payroll personnel working through limited companies. What this really means is that if you work public sector, it is now your organisation’s responsibility to make sure HMRC receives correct tax contributions from your contractors.
What does this mean for Digital Transformation initiatives?
The government’s Digital Transformation initiative remains an ongoing journey for the public sector and delivering a world class digital service for the public remains a top priority of Government. What the IR35 changes will affect however is how public sector bodies should continue their working relationship with software and IT contractors they are currently engaged with or appoint in the future to help deliver their digital transformation plan. Moving things online, having a unified platform and digital consolidation all benefit from great software.
As a public sector organisation, your scope of responsibility is now extended to determining the employment status of all your off-payroll workers and also ensuring you are able to ascertain an ‘assurance’ from contractors that they are outside the scope of the IR35 legislation.
The biggest challenge that the recent IR35 shake-up poses to the public sector is uncertainty. How much time and resource should be allocated to determining the employment status of all off-payroll workers? How many contracts will be complex and require legal assistance? Will there be an exodus of contractors following the IR35 shake-up? Will day rates go up? Will the project costs go up?
Uncertainty is not only a frustrating issue to deal with, it poses real risks to business operations and should therefore be dealt with proactively.
Whilst the IR35 legislation changes might be frustrating, they are here to stay. Government has signalled its intent to crack down tax avoidance and if your organisation uses them, it is now your responsibility to ensure compliance with the legislation.
What are your options?
At a high level, there are three options available to public sector bodies looking to deal with the upcoming IR35 shake-up:
The first option is to continue to use contractors, whether these are the ones in place or replacements, you will need to consider the impact on the project. Some may want to increase their day rates to cater for these losses, can you afford a premium on the project being added? Can you afford to renegotiate costs mid way through projects. Do things have to go on hold while you figure it out. What happens of the team walk out as the budget is fixed and they aren’t happy about these cuts, what about lost morale if forced to take cuts. So many unanswered questions but I think we can be sure it will have a detrimental impact, definitely on cost and possibly on delivery.
A safe way to tackling the uncertainty of the IR35 changes but this option is costly and still leaves organisations with the additional HR requirements relating to hiring and retaining staff. Not to mention the fact that software projects are temporary and sporadic in nature, often requiring extensive work to tight deadlines. What happens when the holidays of key personnel on the payroll coincides with crucial deadlines, or worse, what do your inhouse staff do when the software project comes to an end?
Really the only way to deal with the upcoming uncertainty and still ensure your organisation is achieving its software objectives is to work with an outsourced software supplier. By firming up the distinction between employee and supplier, you will be able to achieve your objectives and avoid the headache of IR35 altogether.
Government has made its intentions to stamp out tax avoidance clear and the IR35 legislation changes for the public sector are here to stay. To deal with these changes, organisations in the public sector need to be proactive and take steps now to deal with the changes to IR35 and tackle the uncertainty it presents . We specialise in medium to large scale software solutions and would be happy to discuss any current or future projects that are in progress or under consideration.