Key options for companies looking to become IR35-proof
By Kirsten Logue
January 4 2020 - IR35 will hit the private sector in April 2020. Its impact could be extensive with the tax responsibility moving away from the individual towards medium and large private enterprises. Kirsten Logue, Scotland Regional Manager for Edge Testing explores the key IR35 issues impacting the private sector and considers the options for making a company 'IR35-Proof'.
IR35 legislation for private companies comes into force on the 6th April 2020, leaving medium and large-sized companies only a few short months to ensure they can mitigate any possible IR35-based risks. At Edge Testing, we are seeing a slow but steady awareness dawning on our client base that IR35 could severely impact and possibly impede enterprise growth through the introduction of yet another business risk.
Despite the many papers analysing the impact of IR35 on the private sector, some of our clients are still unsure of the true level of risk they face. In summary, the off-payroll rules will shift the burden of deciding employment status from the individual contractor to the client. If the company in question is caught by the ruling then the contractor's agency or worse still the actual end client will become liable for paying employers' NICs and tax liability.
There are consultation responses requesting the launch of private sector IR35 to be delayed (at least until 2021). The key concerns are based around the lack of trust of the CEST Tool (Check Employment Status for Tax). This multiple-choice tool was deployed in 2017 for the Public Sector's IR35 calculations. Its purpose is to understand if an individual's contract falls within IR35 and therefore should be classed as employed or self-employed for tax purposes. Questions asked within CEST include:
- Does the contractor provide their services via a limited company?
- Can the worker provide a substitute (or have they already)?
- Is the contractor an 'office holder'?
- To what extent does the client exert control over the contractor, e.g. can they move the contractor to a different role/location, decide how and when the work is done?
- Does the contractor receive any 'employee' type benefits from the client?
- What happens if the client is unhappy with the contractor's work?
- How is the contractor paid - fixed price or by time period?
There is great concern that CEST does not take 'real-life' scenarios into consideration and that each contractor may have specific work scenarios that are peculiar to that individual and his or her relationship with the client - in other words CEST is too generic and uses only 16 questions to consider if an individual is in or out of IR35.
Another possible risk is that some companies may make broader assumptions about their contractor base at either a project level or even enterprise-wide rather than assessing contractors individually. This is a high-risk strategy especially when one considers that the HMRC has confirmed that it will conduct reviews retrospectively going back many years to confirm IR35 status individual by individual.
For some companies, IR35 is already considered a risk they are not willing to entertain. Barclays, for example, has announced it will no longer engage contractors through limited companies or agencies - all resources are to be engaged on PAYE basis only moving forward. Many other large companies are likely to follow in the coming months.
The contractor market has for years provided a readily available source of expertise for the IT sector. It has provided niche technical skills, available for as long as the client requires and typically at short notice, thus supporting reactive as well as proactive resource demands. But if under IR35 the risk of using contractors outweighs these advantages, what are the alternatives available to organisations?
At Edge Testing we provide a number of service alternatives to a traditional contractor solution which ensure that our customers are fully protected from IR35 risks. These include:
- A full Managed Service - the managed service approach suits those companies that require a strategic test partner which can be an ideal and low-risk vehicle for moving away from a large contractor-reliant model. For the client, a Managed Service means they can outsource specific processes and functions with the objective of improving operations or reducing costs. The client and Edge Testing are bound by the contractual service-level agreement which defines the performance and quality metrics of their relationship.
Our Managed Service test teams are made up of staff ranging from Test Analysts through to Senior Test Managers. The services are overseen by Service Delivery Managers at no additional cost to the client. Edge Testing already provides many companies with a full end-to-end testing service catering for all test phases, approaches and key test disciplines. The service is very flexible with 90% of our managed service clients deploying both functional and non-functional service features. Another advantage of the Managed Service is knowledge retention. This is achieved through documentation to capture client system and business knowledge - a key advantage over the contractor model where any knowledge is lost upon completion of the contract.
- Test Academy - another option for an organisation is to 'grow their own'. This focuses on building up a permanent internal test pool to replace the contractor model using graduates or apprentice-based schemes. However, this approach comes with its own challenges with the added effort required to identify, employ, mentor and train 'new blood'. At Edge Testing we take all the hard work away from the client by deploying our own Edge Test Academy. This is aligned to an intensive training programme and then full exposure to working on the client's site with support, mentoring and pastoral care. After an agreed period, typically twelve months, the client can then offer full time employment to the candidates, with no additional recruitment fees. This award-winning IR35-proof service has already proven extremely successful with companies such as Deloitte, Gatwick Airport and Nimbus Cloud taking it up.
- Digital Test Hub - a key advantage of the contractor model has always been the ability to rapidly take on and then remove additional test effort at very short notice. Although this might seem a challenge to replace using some form of permanent workforce, there are excellent effective and efficient solutions available at a much lower comparable cost than the contractor model. At Edge Testing, for example, we are able to provide a continuous on-demand low-cost testing service utilising our Digital Test Hub teams based across the UK. Rates, which start at £210 per day are highly competitive against average contractor rates and are fully IR35-compliant. Service take-up can be achieved quickly within a 1 - 5 day window with the added flexibility of ramping the service up and down as demand requires. In addition, there is no minimum or maximum team size - the client service dictates what is required, when it is required and the size of the team.
The IR35 challenge need not mean the end of a flexible external test workforce. There are solutions available to fit each organisation's ongoing tactical and strategic resourcing needs. Edge Testing believes that IR35 has, in many ways, streamlined and added greater efficiency to future resourcing models - bring it on!!