Here we go again. The UK has a tradition of creating temporary business sectors to make money off the back of new legislation for those less in the know. Unfortunately, IR35 isn’t going to be any different. For instance, when GDPR was passed in 2016, suddenly “GDPR Advice Services” were everywhere. It’s important to remember that getting into business is easy. But trolling PMQ’s and Whitehall for business ideas isn’t entrepreneurial, it’s ambulance-chasing. Staying in business means making a product or service based on a permanent need.
What does a software development company have to say about IR35, isn’t this something for accountants? Well yes, if you want to know the in’s and out’s of the minutia, definitely call your accountant. Bookable is a business resource hub, we don’t provide tax advice. However, after quite a bit of gonzo journalism on my part, this article will show you how IR35 will play out for contractors no matter which industry you are in.
What is IR35?
The history: IR35, first introduced by Gordon Brown, came about mostly because of the construction industry. It was helped along in the media by the recent court case against Uber. Construction accounts for 9% of the UK workforce, employing just over 3 million people. But construction is a transient industry since its business model is based on projects. You build the house, or a bridge… job done. The moment a project is finished, people are out of work. So construction companies have a very long history of employing people “on contract” so they don’t overrun project costs by paying unneeded salaries when there is nothing to do.
The problem is many construction “contractors” report to the same office as salaried employees do. They work the same hours, are required to follow the same policies, and use the same company assets to accomplish the same tasks. Sounds like an employee to me. Despite this, they make a higher rate of pay by contracting their services. The construction company has more margin to play with because it doesn’t have to pay out for employee NI or pensions. The contractor makes more because they can claim minimum wage and take the rest out in dividends at a lower tax rate while also lowering their tax burden by claiming expenses. It’s a win-win for all involved and a complete tax-dodge.
The government is upset because as you repeat this behavior across 10% of the entire economy for several decades, it’s a tremendous loss of income. With all this tax avoidance, it makes me wonder how Carillion ever failed… but that’s another blog.
When does it come into effect?
March 29th. Companies are screaming bloody murder trying to get it delayed yet again, but this seems doubtful.
Am I Inside vs Outside IR35?
This is getting into the nitty-gritty. The best thing to do is either contact your accountant or for a rough guide, you can refer to HMRC’s online calculator.
How companies are likely to hire contractors
Employers, especially project-based businesses, face a dilemma: how do we hire someone for the duration of the project or a section of the project without overrunning on salary costs? The answer is fixed-term employment contracts advertised as full-time employment.
We noticed a few weeks ago that potential projects would advertise for contract roles but transition the conversation toward full-time employment. What seems to be making a comeback is the fixed-term contract. In other words, full-time short-term contracts with few employee benefits and longer probationary periods. Businesses want this because it allows them to maintain control of your working hours and the tasks you accomplish for them.
The new IR35 business sector
“Payroll companies” are the new kid on the block. As we always say, it’s all in the pitch. Looking behind the curtain of this pitch we have found that “payroll companies” or “IR35 specialists” are glorified employment agencies who bundle payroll into their service. It’s not the worst business model in the world and may stick around for as long as the political winds of Whitehall make it profitable.
How it will play out: “Payroll companies” will provide labor pools that employers can continually outsource to and receive invoices from. It’s an added middle man that takes the employment risk away from the employer.
What to watch out for: Watch out for payroll companies specialising in a specific industry. This is a tell-tale sign that they aren’t really a traditional payroll company. After all, a tax-code is a tax-code, whether it’s the construction industry, IT, or mining. If you work with them, make sure they are a registered accounting or bookkeeping practice. Otherwise, a great many financial quagmires can occur. I sense a few mis-selling scandals in the future.
How small contractors can win
However, small businesses making their money on outside IR35 style contracts are going to feel the squeeze. From a financial standpoint, it’s all the same to all parties. However, from a standpoint of reliability, the larger employment agencies (or payroll companies) are going to win the day in the long run.
The best thing to do is grow your company to a few more employees. Secondly, build a strong rapport throughout your sector. Get known as a no-nonsense contracting company that gets projects done on time and under budget. This is good business practice anyway, but by focusing on this you will take away the temptation of Contracting companies flirting with the new kid on the block.