It’s no secret that the new IR35 tax legislation has made hiring contractors more challenging. The perceived hassle – and fear of getting it wrong – has left many businesses taking what they see as the line of least resistance: hiring fewer contractors – and only hiring inside IR35.
This blanket approach of hiring all contractors inside IR35 is unsustainable – and ironically, could actually result in businesses breaching IR35 rules. We chatted to our own Gary Fay and Pete to find out why it’s so crucial to correctly determine IR35 status and how to make sure you’re hiring safely outside IR35…
- Our expert guide to IR35 leaves no stone unturned. Download it here.
The cost of fear
Businesses are afraid of IR35. One of the fears is that you’ll determine a contractor’s status as outside IR35, get it wrong, and find yourself facing a hefty fine – or even business closure. There is some truth in this. The cost of an incorrect tax status can be huge. However, the response needs to change. Gary explains why burying your head in the sand and blanket hiring everyone as inside IR35, is not the solution:
“This can be ‘close your business down’ stuff, if you do not get it right – and that’s why it’s so weird that businesses haven’t educated themselves about this.’
When contractors are inside IR35, you are responsible for their tax and NI contributions. That means a contractor who used to cost you £500 a day, is now going to cost you around £650.
” The cost of proper compliance is actually far less than taking the shortcut approach”
When you blanket hire everyone as inside IR35, in some cases you’ll be spending much more money than you need to. Contractors who legitimately fall outside IR35 are responsible for their own tax and NI, so why process them as inside IR35 and waste money? Gary goes on to explain that the cost of proper compliance is actually far less than taking the shortcut approach.
“Organisations have come to the conclusion that it’s far less risky to just push everyone inside IR35. This decision alone increases their costs significantly. Interestingly, the cost of compliance is actually far less than the blanket only hiring inside IR35. You could hire a contractor outside IR35, less risk, fully compliant, and significantly reduce the cost of your project.”
Pete clarifies just how significant this reduction could be:
“As we’ve said, that £500 a day contract has now become £650. If you multiply £150 by 240 days a year, that’s quite a lot of money (£36k per contractor). The cost of changing the contracted work to a deliverables based approach and managing a contractor outside IR35 is much less.”
When should you hire outside IR35?
For a contractor to be deemed outside IR35, they need to be operating as a genuine contracted business. They are providing a service based on deliverables, rather than acting as an employee. The responsibility of determining this tax status correctly lies with you, the employer.
Gary and Pete argue that a contractor’s tax status isn’t just determined by how they operate. It’s largely down to how you manage your projects. They believe that if businesses change the way they structure their work, more contractors would naturally fall outside IR35.
“One thing that has to change is the way organisations manage contractors,” Pete begins. “If they start moving to deliverable based work, I think what we’ll see is companies getting more value out of their contractors – and a lot of them will be pushed outside IR35.”
So what does this look like in practice? While inside IR35 contractors are treated much more like employees (daily management, regular check-ins), outside IR35 contractors operate much more autonomously. For this to work, you need to measure deliverables, rather than time.
Outside IR35 contractors set their own working hours, work unsupervised, and they work towards targets. It’s the equivalent of someone coming to fix your plumbing: they have a clear goal to work towards which doesn’t require overseeing or management.
- For a full list of IR35 status indicators, download our complete guide to IR35 here.
While this would be a significant change for most companies, Gary and Pete explain why businesses that embrace this model will have an advantage:
“Companies need to embrace IR35 legislation and learn how to apply it. Those who use the new legislation and reset how their company uses temporary staff will succeed. They can actually use the legislation to drive more ROI from expensive contractors by making them more delivery focussed.”
Images via AdobeStock and Pixabay
