IR35 and its impact on the IT industry
The imminent introduction of the IR35 in the private sector has meant yet another disruption to business continuity following the blow caused by the pandemic. As a result, companies from across the industries need to carefully look at their contractors and decide on the best approach.
However, for companies in the technology sector, especially in the pandemic, reconciling HR needs with the new legal requirements may prove a bit more challenging than for others. But before we delve deeper into the specifics of the technology world, here’s a recap of what the IR35 is all about.
What is IR35?
The IR35, also known as the off-payroll working rules or the Intermediaries Legislation, is UK taxation law concerning tax and National Insurance Contributions (NIC) for those workers (occasionally referred to as contractors) who provide services to a client through an intermediary.
The IR35 has been in operation in the public sector since April 2017, and from 6 April 2021, the legislation will also apply to large and medium-sized private sector companies.
What does an intermediary mean in the context of IR35?
An intermediary could be the worker’s Personal Service Company (PSC), but also an agency, a partnership or an individual.
Inside or outside IR35?
The client, sometimes known as the hirer, the engager, or the end client, is the one who is responsible for establishing if the off-payroll working rules apply. And, if they do, they are also liable for the payment of NIC and tax.
So how do you do that as a recipient of services from a contractor?
The recommended route and, at the same time, the safest option is to use the Check employment status for tax tool provided by HM Revenue & Customs (HMRC).
To check if your worker should be classed as employed or self-employed for tax purposes, you will need to answer questions regarding the details of your contract, including:
- the worker’s responsibilities,
- who decides what, when, where, and how the work is done,
- how they will be paid,
- if the engagement includes refunds for expenses or any corporate benefits.
If your worker is inside IR35, HMRC will see them as an employee for tax purposes, which means you, as the client, are required to deduct their NIC and income tax under the Pay As You Earn (PAYE) system for HMRC.
If your worker is outside IR35, then the gross fee can be paid to the PSC who then decides whether to classify this as ‘employment income’.
IR35 and the options for employers
Having carefully checked the status of each contractor individually, the engagers have the following options consider:
1. Hiring your contractors as permanent employees
In terms of costs, this of course means more than their salary and NIC – you should also take into consideration the following:
- holiday pay,
- sick pay,
- costs of training (and recruitment if looking for new people),
- costs of office space and equipment,
- any employee benefits your company may provide.
2. Hiring your contractors through a compliant umbrella company
As part of their IR35 compliance strategies, some large enterprises chose to phase out their use of PSCs and limit their engagements with contractors to those working through a third-party employment agency or an umbrella company.
Such companies act as employers on behalf of contractors which means workers hired this way will have their PAYE tax and NICs deducted from their salaries by the agency/umbrella company.
The caveat, however, is that these companies charge fees for their services, but this option does take away the IR35 compliance risk.
3. Proposing that your contractors move abroad
If your contractor is willing to move abroad for permanent residency, to work outside the UK and legally NOT be a UK taxpayer, the IR35 rules would usually not apply.
In real life, though, not many contractors would be willing to do this. And, if they would, your company’s policies may mean that your department’s budget is charged for the contractor’s move abroad.
4. Hiring an overseas contractor – e.g. nearshoring
Finally, an option would be to cooperate with an overseas company where work is performed outside the UK and whose workers are non-resident in the UK for tax purposes.
This would mean that as a UK-based large/medium-sized private sector company you would not be required to define tax status of these workers or pay their NICs or tax, since IR35 would not apply.
IR35 and the technology sector
With private sector IR35 looming, the tech & IT world is in a unique position here.
On one hand, over the last decade or so, it has been one of the most understaffed sectors across the economic landscape. A key finding of the Harvey Nash / KPMG CIO Survey 2020 was ‘skill shortages, even in a pandemic’. As the report says, ‘for the first time in this survey’s history, cyber-security expertise has become the most in-demand skill set, especially in the cloud and data security space.’ With 35%, cybersecurity is followed by organisation change management (26%), while enterprise architecture, advanced analytics and technical architecture all reached 22% as the top 5 most scarce technology skills holding organisations back.
The IT talent shortage situation is bad. In fact, this result is only a slight improvement from the 2019 survey – also by Harvey Nash and KPMG – which reported skills shortages were at an all-time high with 67% of CIOs struggling to find the right IT talent, particularly in the areas of big data/analytics, cyber security and AI.
On the other hand, however, the tech & IT world, has a massive advantage which the other sectors can’t enjoy, namely – enormous opportunities to find specialised IT workforce nearshore. Of course, the ability to do IT work remotely is a massive bonus which not every work area can enjoy.
But let’s take a closer look at why nearshoring would be a reasonable option.
Addressing workforce challenges in IT through nearshoring
Some of the many benefits of using nearshore as means of accessing additional IT talent pool include:
The last 12 months or so have shown us clearly and quite brutally, to be frank, the importance of being agile and flexible. With lack of confidence in what the future holds, nearshore cooperation can be a muscle you can flex as and when you need it.
In the age of remote working, physical proximity no longer matters so much. However, when things get back to ‘normal’ whatever it may be, you may want to hop on a plane and meet your team physically without a long-haul journey. Of course, same time zone is a bonus, no matter if we live in a fly or no fly world.
3. Cultural closeness
And, speaking of proximity, geographical closeness often tends to be associated by cultural closeness – similar values, similar work culture and similar holidays/days off.
4. Client experience
Nearshore services have taken off together with the development of reliable internet infrastructure and, in Europe, UK has lead the path as the main client. This long British experience with nearshoring, means a strong community of nearshore users who have a wealth of knowledge and experience in nearshore outsourcing to draw upon.
5. Nearshore provider’s experience
The experience of service receivers is mirrored by the experience of nearshore service providers – software development companies in countries like Poland.
Along the years, many companies have grown immensely, both in size and in variety of services provided. A good example here is us, Future Processing. We started in 2000 with just 2 people providing lines of code for our first UK client. Now, 21 years later, we are a company of approximately 800 talented developers, testers, business analysts and other tech experts delivering highly specialised services spanning IT discovery and strategy to software development.
For the business world, IR35 means unwelcome complications. However, for the IT sector in particular, it also opens it to opportunities of looking elsewhere. Using nearshoring to balance resourcing needs with the upcoming legal requirements just one of the options. Having said that, it is an option which seems reasonable, and is probably less complicated than you think. Do you want to find out more? Let’s have a chat!
To the best of our knowledge, information provided in this article is accurate at the time of publication. It does not, however, constitute professional advice, therefore we recommend that you strictly follow government guidelines on IR35 and consult a tax specialist.