The #IR35 changes will heap cost and burden onto business, and restrict the UK’s greatest competitive advantage – it’s flexible labour market. A tweet from Andy Chamberlain, Deputy Director of Policy and External Affairs, IPSE, in 2018.
Perhaps unsurprisingly, when upcoming IR35 regulations were announced in 2017 for the public sector (and then in the 2019 for the private sector) it was met with scepticism and anger from contractors and businesses alike.
The delay of the IR35 rollout till April 2021 has offered some temporary respite. However, research from Be Digital UK found that 40% of businesses are considering phasing out contractors once IR35 legislation goes live.
Whether positive, negative or indifferent, you are likely to have your own view on IR35 too. In this post we will explore the importance of contractors and the UK’s on-demand talent pool. We will also look at why the government would rather view contractors as tax evaders.
How do contractors work?
Contractors are integral to the UK economy as companies can get the skills they need, when they need them. They gain short-term experience of working for a client and then help other businesses in doing something similar. Furthermore, rather than just staying in one job, contractors adopt a growth mindset. They pick up an array of skills and knowledge as they are working for a large number of companies. This adds value to society as it allows organisations to match the competitive advantage that early adopters have.
Without contractors who hop from one client to another, competitive advantage gained by one organisation (developing a new IT solution, for example) would take very long to match. This creates a more level playing field and prevents a runaway winner from forming a monopoly.
“Contractors are integral to the UK economy as companies can get the skills they need, when they need them.”
What is an on-demand talent pool?
An on-demand talent pool is all the contractors who wish to offer their services as an independent business outside of IR35. Having access to a talent pool is beneficial as it improves the quality of hire and reduces the time and cost to hire. In addition, in times of economic growth a talent pool acts as a safety net so an organisation can quickly hire new talent.
Having access to new talent also allows organisations to catch up with others as they can benefit from the learning of the pathfinder. If the businesses in an industry didn’t have access to an on-demand talent pool, market leaders would always dominate the market which would leave consumers with little choice. Thus, an on-demand talent pool is an important societal asset that must be preserved.
The HMRC view – are contractors tax evaders?
The view from the government is slightly different, with contractors portrayed as tax evaders by HMRC. They believe that that only 10% of contractors are compliant in the area of IR35, hence the introduction of tighter tax regulations. Speaking to Accountancy Age, our Director Amit Kapoor said:
“In our view, the government tends to follow a demonise-legislate-tax approach for segments of society it wants to target. The sound-bites from the government suggest that contractor tax avoidance is seen as a societal imbalance that needs to be corrected.”
It was expected that between 2020 and 2024, the reform would bring in £3.1 billion for the Treasury – although the actual amount will be lower as the rollout was moved to April 2021 due to the impacts of the coronavirus pandemic. It’s clear that the government view the IR35 rollout as an easy and legal way to increase tax revenues. However, many believe this is unfair as contractors don’t receive the same benefits from their employer as permanent staff do. For example, sick pay and paid holiday.
In this post, we have argued that contractors and the UK’s on-demand talent pool should be viewed as societal assets. They create a more level playing field, which preserves healthy completion and ensures that customers have lots of choice.
The debate around IR35 will continue long after it is finally introduced in 2021. In the background of Brexit and coronavirus, the introduction of IR35 next year will be yet another hurdle for businesses and contractors to jump over.