IR35: The Possible Effect on Technology Resources
Since April 2000, via IR35, the UK Tax Authorities (HMRC) have sought to combat tax avoidance amongst ‘disguised employees’. HMRC are targeting individuals supplying services via intermediary companies—such as Personal Service Companies (PSC’s)—initially in the public sector April 2017, HMRC have since shifted focus onto the private sector.
HMRC expect to see £1.3bn per year in revenues from the additional tax payments (both Income Tax and National Insurance Contributions NIC) by 2023. The fundamental change brought about by IR35 is that the burden of responsibility shifts from the PSC or contractor to the End User (the person paying the contractor). Specifically, Chapter 10 of Part 2 ITEPA 2003 Section 61N imposes an obligation on the end user to make a reasonable status determination.
A contractor subject to IR35 will have to pay tax and NIC in the same way that employees of that company pay tax. These rules will be extended to the private sector from April 2020.
One of our observations is that a number of organisations are making the decision to blanket-place contractors inside IR35, stating that they will no longer engage contractors who provide their services via a PSC, limited company or other intermediary. Placing all contractors inside IR35 without a fair assessment is unlikely to be compliant with the regulation. These contractors are essentially left with two options: leave or engage on a PAYE basis only, the latter of which will have an impact on their income, as they will end up paying significantly more tax.
In addition to protecting their own liability, CEOs and CFOs are potentially also using IR35 as a method to reduce costs and to get their overheads under control. Taking technology resources as an example: the prevalence of emerging technologies and innovation in the renewal of the banking ecosystem, means that financial services companies and market intermediaries have an abundance of contractors focused on technology driven innovation. If the “domino effect” of large businesses opting for a blanket assessment approach (in order to avoid IR35) and cutting all technology contractors by April 2020 continues, there will be a significant increase in technologists in the supply chain. The consequence of which will be an oversupply of resources, driving a potential reduction in contractors’ rates and hence a likely reduction in costs within this sector.
With technology driven innovation at the forefront of the evolution of the banking ecosystem, financial services organisations will always need good technologists. But perhaps a prudent strategy for firms is to “wait and see”, in order to allow time to evaluate which technologists are available in the market and then opting to hire the top talent for roles as full time employees.