IR35

The deadline for changes to off-payroll working  (IR35) is April 6th 2020 and the new rules will come into effect immediately.

 

How will IR35 work:

 

Reasonable care

‘Reasonable care’ must be taken when deciding if a worker is inside or outside of IR35. HMRC has not given much guidance on what is defined as ‘reasonable care’ and It is not clear if there will be further elaboration over what this constitutes. However, it is likely that there will be clearly defined consequences for businesses who fail to take reasonable care, so a thorough approach is crucial.

The changes to IR35 will only penalise those who fail to take reasonable care moving forward.

The policy note released by the government has stated that the changes to IR35 are not retrospective. HMRC will only focus on ensuring businesses comply with the new rules moving forward. Even in cases where someone is found to be incorrectly classified in relation to IR35, it will not automatically lead to a backdated investigation.

Additional Reporting

The government has already rejected additional record keeping as a solution to make sure IR35 is properly monitored. Therefore, it looks likely that hirers and agencies will have to conform to additional reporting obligations. 

 

Moving forward:

 

 

Small businesses will be excluded from the changes

Small businesses, as defined by the 2006 Companies Act, will be excluded from the changes to IR35. The Companies Act provides clearly defined criteria relating to balance sheets, turnover and number of employees. In addition, an existing small company would have to not qualify for this criteria for two consecutive years before losing it’s small company status.

 

Alternative supply models and Statement of Works

It is looking extremely likely that banks will have to turn to alternative supply models for their flexible workforce.  A key alternative supply model is likely to be the Statement of Works (SOW) route. With a Statement of Works a service is being provided with clearly defined deliverables rather than ‘labour’.

A properly established SOW, which focuses on deliverables and is within the caveat of ‘reasonable care,’ changes who the end client is, shifting the responsibility of employment status determination to the SOW provider rather than the firm who engages the SOW provider’s services. In the financial sector this, along with the above small business exemption, provides large incentives for banks to use niche financial consultancy suppliers.

There are still strict considerations here around ‘substance over form’. HMRC will require that such arrangements are genuine and may scrutinise contracts and working practices between the client and statements of works providers. If it is found that such an arrangement isn’t properly executed or reasonable care hasn’t been taken this might result in liability to the firm who engages the SOW provider.  

 

How might banks now resource Change?

 

 

Permanent Full Time Employee (FTE)

Here there is no IR35 risk as employees pay as they earn. This model [deleted text]  also allows for the retention of bank specific skills, knowledge and culture.

  • However, this is largely inflexible and does not allow for the fluid process change requires. To rapidly increase or rapidly reduce the number workers on a project requires complicated or protracted HR process and redundancies. Permanent change functions are also less likely to have the wider ranging knowledge that consultants who have worked in a large number of banks and projects, typically bring with them. Finally, this creates increased responsibilities for banks. Here the Bank is responsible for employee rights and protections and payroll costs such as national insurance. In sum the FTE model is a poor match for projects which require flexibility and rapid change.

Fixed Term Contractors (FTC)

Like FTE’s above, there is no IR35 risk for banks as FTC are all on PAYE. This model also operates at a lower cost in comparison to day rate contractors or FTE’s as it usually involves paying pro-rata salaries without bonuses.

  • However, there are many issues with this model. It significantly reduces the talent pool for the project as this is the least favourable option for workers. They do not receive the benefits associated with contract work whilst simultaneously have no employee benefits, therefore for workers this is the worst of all options. FTCs are also less likely to have the bank specific knowledge FTEs have.

 

PAYE Agency/Direct Contractors (Inside IR35)

This offers more flexibility as employers can hire contractors specifically for the purposes of that project/programme. Therefore, they can access the most fit for purpose skillsets on a basis that is easiest to increase or downsize the workforce as necessary. There is also zero IR35 risk as all contractors are PAYE.

  • However, there are a number of disadvantages to this model. Firstly, there will be PAYE costs if operating inside IR35, as the bank will be responsible for payroll and associated NI costs. It will also significantly reduce the talent pool as contractor rates will be negatively impacted by being deemed inside IR35. The highest quality project and change resources are likely to favour routes that allow them to continue to work outside IR35 or conversely that come with the associated benefits and protections of being an employee. As above, there is also a lack of bank specific knowledge, processes, systems, infrastructure and culture

 

Agency/Direct Contractors (Outside IR35)

This is a low-cost method, as direct/agency fees are usually relatively low because if the agreement is outside IR35 there is no need to pay contractor higher day rate or PAYE costs.

  • However, as seen with recent statements for the banks this method is too high risk given IR35. It is therefore not a realistic option as it is almost impossible to ensure all contract engagements would be outside of IR35. Bank are already likely to be a high-risk target for investigation from HMRC and there would be significant issues and costs if HMRC deems bank has incorrectly judged a contracts engagement to be outside IR35.

 

SOW: Large/Big4 Consultancy (weighted towards perm consultants)

This option has a lower IR35 risk to the bank as there is likely to be a properly executed SOW. This means the consultancy is an outsourced service provider and therefore the ‘end client’ and responsible for determining the workers tax status. There are also no PAYE costs as regardless of whether an engagement is deemed inside or outside IR35 if the bank is being provided with an outsourced ‘service’ rather than ‘labour’ they are not responsible for any associated costs. Large consultancies such as the big four also have wider market knowledge and are change professionals who have knowledge of how change has been deployed on similar programmes.

  • However, there are higher costs associated with large consultancies as they often have high overheads and bench costs when their consultants are not deployed on a project. There is also the risk that they do not have the required workforce and instead use consultants too junior for the needs of the project or programme. They also may have a lack of bank specific knowledge, processes, systems, infrastructure and culture.

 

SOW: Consultancy (Boutique/Small – Associate Model)

Under this model there is low to zero IR35 risk as there will be a properly executed SOW. As mentioned above, this means the consultancy is an outsourced service provider and are therefore the ‘end client’. This makes them solely responsible for determining the workers tax status. In addition to this there are no PAYE costs regardless of whether an engagement is deemed inside or outside IR35. If the bank is being provided with an outsourced ‘service’ rather than ‘labour’ they are not responsible for any PAYE associated costs, therefore this seems like an obvious solution for banks. As mentioned above, small companies are exempt from the changes brought in by IR35, this is therefore an extra layer of protection from the risk of being targeted by HMRC or being liable for any PAYE associated costs. Consultancies also have wider market knowledge and change professionals from consultancies are likely to come with knowledge of how change has been deployed on similar programmes. This model also offers more flexibility as it allows consultants to be deployed specifically for the purposes of that project/programme therefore accessing the most fit for purpose skillsets on a basis in line with the project’s requirements. Small consultancies also likely to be able to offer a large talent pool, and this is only going to increase, as the top consultants are likely to favour this route given exemption from the upcoming changes to IR35.  Finally, boutique/small consultancies with associate models have lower overheads and bench costs and are typically more cost effective than large consultancies.

  • Despite being the obvious choice for consultants once the changes to IR35 come in there are still limitations to this model. Firstly, there are a larger number of suppliers, by nature of boutique consultancies being small, if a programme requires a very large number of change resources then the client will most likely need to use multiple small consultancy suppliers to meet their needs. However, this is not necessarily a negative as this could engender greater competition between suppliers and hence even more competitive costs. As with the big 4 consultancies there is also likely to be a lack of bank specific knowledge, processes, systems, infrastructure and culture.

 

 

The obvious choice:

 

 

Although there are strengths and weakness to every model in regards to IR35, the small consultancies are clearly the obvious choice for change projects/programmes moving forward. Essential Consulting are a niche management consultancy specialising in risk and regulatory change within banking and we fit firmly into the associate model operating only through SOWs. If you would like to know more about this or would like to get in touch to see how we can help please give us a call on 0203 519 7790.

 

By Richard Mills

Head Office Manchester

City Tower, Piccadilly Plaza, New York St, Manchester M1 4BT. 03300104191

London

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