Off-Payroll (IR35) Legislation came into force 6th April...
Procurement and Supply Chain Recruitment Market Update: Off-Payroll Workers Regulations....
The uncertainty about the implementation of the postponed Off-Payroll legislation into the private sector is now clear, IR35 is in! The 6th April brought new off-payroll working regulations into force and as a result, the Interim Market is in a state of flux with people transitioning to umbrella or leaving to find outside IR35 contracts. Our thoughts are that the market will start to settle in May onwards, as organisations and procurement talent start to adjust to the changes.
BACKGROUND:
What are Off-Payroll or IR35 Rules?
The uncertainty about the implementation of the postponed Off-Payroll legislation into the private sector is now clear, IR35 is in! The 6th April brought new off-payroll working regulations into force and as a result, the Interim Market is in a state of flux with people transitioning to umbrella or leaving to find outside IR35 contracts. Our thoughts are that the market will start to settle in May onwards, as organisations and procurement talent start to adjust to the changes.
Cautious Approach!
Most clients, irrespective of sector are taking a very cautious approach to their off-payroll IR35 liabilities. Prevalent policy amongst our clients is a blanket inside IR35 approach, where companies are moving all their limited company contractors to umbrella payment models or fixed term contracts (FTC). Large companies’ appetite for risk is very low and many are looking at all permutations of what he can be considered risk of IR35 liabilities e.g. does someone have a company laptop or a security pass…. then should we be checking their status?
There is the suggestion amongst some seasoned Interims, that clients will ‘come around’ to maintaining their Limited Company contracts, but with organisation significant fear of falling fowl of the new legislation, this is unlikely; as these organisations implement standardised and risk averse off-payroll policies.
Interim Demand is Up!
Overall, we anticipate the demand for interim talent to increase, we have already seen a significant increase in demand for exceptional interim procurement specialists on an Umbrella or Fixed Term Contract Basis.
BACKGROUND:
What are Off-Payroll or IR35 Rules?
The off-payroll working rules are designed to ensure individuals working like employees but through their own limited company (often known as a ‘personal service company’ or ‘PSC’), or other intermediaries, pay broadly the same Income Tax and National Insurance contributions (NICs) as individuals who are directly employed.
What are our clients doing?
There seems to be four main routes being taken;
There seems to be four main routes being taken;
1. The blanket inside IR35 approach - so contractors go either PAYE or via an FCSA accredited Umbrella Solution (i.e. full PAYE and NIC). This seems to be the norm with larger companies avoiding even the slightest risk associated with being liable for unpaid tax, however no PSC limited companies are being considered for contractor roles!
2. Statement of Works (SOW) - - we are seeing some rare instances of companies using SOW contracts, mostly in organisations where they only have one or two interim contractors in the procurement function; these are few and far between.
3. A move towards fixed term contracts (FTC) so, contractors paid on a pro-rata salary basis. This has become far more common; we have seen an increase of over 400% in the last 12 months!
4. The status determination - assessing whether the contract falls ‘inside’ or ‘outside’ of IR35, done for each role. This determination is often being carried out by external consultants or companies, but we are not yet seeing this approach that frequently with our clients, although this I suspect will change once, we’re beyond the 6th of April.
How far down the road are our clients in their determinations and stance?
Well this has varied considerably from one company to another; most larger organisations made their decisions prior to the expected legislation changes in April 2020 and have stuck with that determination. A few larger companies then put the changes on hold for another year (after the legislation was postponed for a year due to Covid). For medium and smaller sized organisations, a many have been playing catch-up and are still working out their policies and processes now!
How far down the road are our clients in their determinations and stance?
Well this has varied considerably from one company to another; most larger organisations made their decisions prior to the expected legislation changes in April 2020 and have stuck with that determination. A few larger companies then put the changes on hold for another year (after the legislation was postponed for a year due to Covid). For medium and smaller sized organisations, a many have been playing catch-up and are still working out their policies and processes now!
What effect has this had on contract vacancies?
There has been a reduction in interim vacancies overall. How much is down to IR35 is difficult to say; some was Brexit related perhaps and certainly Covid-19 impacted the market significantly. Even before the Covid-19 pandemic, we were seeing a marked reduction in the number of contract roles in the market. Currently, there is an increase in demand for Fixed Term Contract, which are generally unpopular with contractors, but we are still finding good candidates who will, and indeed do work on this basis quite happily.
What effect has this had on rates?
On a general basis companies have not increased rates yet to accommodate the extra tax that contractors deemed inside IR35 are having to pay, in most instances it’s a ‘like it or leave it’ approach.
The clients who have managed to determine that their roles fall outside of IR35, or work on a statement of works contract basis get much greater responses and thus a better choice of contractor for the same rate!
What does the future hold for contractors and clients and what will happen to rates?
Our feeling is that in the short to medium term (1-2 years) 90% of contracts will either fall inside IR35 or clients will not take the risk of engaging with PSC’s. I think that fixed term contracts will still prove popular with clients while there are enough good candidates in the market to fill these roles. Current levels of unemployment mean there is a supply of good candidates for most disciplines and categories, sadly, some of whom having been made redundant during the Pandemic. Longer term as the recovery gain momentum then, we believe IR35 contracts will still be the norm, but rates will need to increase to attract the best talent.
Don’t forget, whilst this is new to the private sector, it is well established in the public sector. Rightly or wrongly, there is more appetite in the public sector to provide an uplift to the rate to counter any IR35 ‘hardship’… this was driven primarily by supply and demand. Currently supply outstrips demand in the private sector, and probably will continue to do so in the imminent future.
Conclusions
The Government has indicated it would conduct further research into the long-term effects of the IR35 tax reforms in the private sector, but we think it is unlikely that this will result in the government abandoning, fundamentally rethinking or delaying the IR35 reforms further.
We all need to ensure we have carefully considered, and prepared for the IR35 changes due in April, they have significant effects for both Interim specialists and those wishing to utilise their talents. As ever, good preparation and open and honest dialogue will be critical in securing successful interim recruitment outcomes