Why does scrapping contractors pose a greater risk to firms than IR35 reform?

Will this risk-averse strategy pay off and protect these companies?

It’s likely you’ll have read that a number of banks have made their position on IR35 clear in recent months, with several financial services companies ready to stop engaging contractors outside IR35 as a result of reform next April. 

One way or another, before IR35 changes are introduced to the private sector on 6th April 2020, the likes of Barclays, Lloyds, RBS, HSBC, Tesco Bank and Morgan Stanley, will reportedly move contractors onto the payroll, whether that’s by asking them to work as employees, through umbrella companies or inside IR35. 

These private sector companies’ thought process is that by giving contractors no option but to be paid via PAYE, they will avoid IR35 reform. This is because the IR35 rules do not apply to contractors working through umbrella companies or as employees, while HMRC will not dispute any engagements in which independent workers operate inside IR35.

But will this risk-averse strategy pay off and protect these companies? Or does scrapping outside IR35 contractors altogether present a greater threat to the private sector firms gearing up to employ this strategy? In our expert view, it’s a risk not worth taking. Here’s why…

 

Potential skills shortages

The reality is, contractors would prefer to continue working independently and outside IR35. Should private sector firms give contractors an ultimatum – to go PAYE or leave – it would become quite difficult for these workers to command similar rates or pay when working on a company’s payroll. 

There is, after all, a significant difference in a contractor’s day-rate and the salary they are likely to be able to command as an employee, for example. With this in mind, there is a strong chance that contractors will leave their current roles in search of opportunities with firms that will compliantly engage them outside IR35. We believe there will be plenty of opportunities to work as a genuine contractor too. Our work alone with over 100 businesses and recruitment agencies suggests that there will be tens of thousands of outside IR35 contracts after reform is enforced.

Needless to say, if contractors down tools it would leave these businesses with skills shortages, impacting the completion of business-critical projects. 

 

Significant cost implications

In addition to the potential loss of highly-skilled talent, shifting contractors onto the payroll is expensive. And this is before the overall costs of employment are taken into account. For example, from April 2020, businesses that make genuine contractors work as employees will find themselves needlessly paying employer’s National Insurance Contribution, employer’s pension contributions, not to mention the various other expenses that are incurred when hiring an employee. These include office and equipment costs, sick pay, holiday pay and paid maternity or paternity leave.

Put simply, the total cost of hiring a contractor outside IR35 in comparison to an employee tends to be cheaper, despite the fact that independent workers’ day-rates might make them seem, on the face of it, more expensive.

 

Administrative burden

Transferring thousands of contractors onto the payroll is no mean feat. Nor is looking after these workers in line with an employer’s HR obligations, should they become employees. 

While private sector firms might argue that assessing each and every contractor’s IR35 status is an intimidating job, in contrast to onboarding thousands of employees, it is at least a one-off task assuming that the details of the contractor’s engagement remain the same.  

 

Restricted business agility 

Contractors offer businesses unrivalled flexibility, with outside IR35 workers typically engaged as and when. This helps organisations cope with peaks and troughs in demand. By ruling out engaging contractors and offering these workers employment positions, for example, these companies will lose the ability to keep a lean, agile workforce that can be scaled at will. 

Only time will tell as to whether these financial services firm rethink their position. There is, however, at least one thing we are confident in: that IR35 reform is manageable and independent IR35 contract reviews supported by insurance offer a cost-effective, compliant solution to IR35 reform that allows companies to continue benefiting from the skills and flexibility that contractors offer. 

With over 25 years’ experience, Qdos is a specialist IR35 adviser and IR35 insurance provider and we review on average, over 2000 contracts every month. Since 2000 and the introduction of the IR35 legislation, Qdos has handled more than 1,600 IR35 enquiries, saving UK contractors over £35million in tax. We are currently helping more than 100 companies prepare for IR35 reform.