Different end clients with different approaches
Please note: this blog was written before the IR35 implementation date was delayed to April 2021, however the information contained in this blog is still relevant and helpful.
We are now less than seven months away from the implementation of IR35 Reform in the private sector and more end clients are starting to confirm how they will initially propose to handle the changes to the Off Payroll working rules, which will apply to where any contractors in the supply chain are providing services using a limited company from April 2020.
In the public sector there was a very clear cascade mechanism with the likes of NHSi advising NHS Trusts on the approach sought. In the private sector, without that mechanism in place, we have already started to see a wide variety of different approaches. The private sector response, as expected, is already more varied and there are some interesting approaches being taken. Some of these are extreme though, perhaps too extreme.
In this article we review the different approaches that end clients are taking and the effect it may have on them, their projects, and their ability to engage with the flexible workforce community compliantly. A workforce that is set to grow significantly despite these changes over the coming years; a workforce that we are very well setup to support.
It’s important to note that organisations in the private sector who are making changes to how they engage workers now, are doing so before the legislation changes. Making these changes at this point is essentially a commercial decision to how they engage with the flexible workforce. At the moment end clients will not necessarily have to consider the ‘reasonable care’ element as that is linked to the legislation that will come in next April.
Limiting their options?
In the most extreme cases, and perhaps not taking the most sensible approach, are the businesses stating that they will no longer engage in any contracts where there is a limited company contractor in the supply chain.
If a client chooses to completely remove limited company contractors they may be unknowingly putting their business at a disadvantage; in the future they will struggle to attract and engage some of the highest quality service providers on the market. An unnecessary decision and certainly not a sensible approach, especially when there may be critical projects needing completion with a niche skill set that warrants engaging with limited company contractors who can deliver.
The pragmatic approach
The most sensible approach. With this approach customers are taking the time to understand the changes, put a process in place and are willing to engage compliantly with umbrella company or limited company contractors, whether the rules do or don’t apply. As part of this approach they are open to alternative compliant models, e.g. PAYE or Off-Payroll Vendor models where the limited company is still used on Inside IR35 assignments. These organisations are the ones who will compliantly manage the changes and end up with access to the best available contractors, as well as minimising the impact on their current flexible workforce.
Commercial advantage/competitive edge
There is a competition element to this as well. For example, think about a highly specialised contractor who operates using a limited company to provide services having a choice of two clients who require those services. The contractor will choose to engage with an end client who has fully understood the Off-Payroll working rules and has structured the requirement correctly allowing a limited company contractor to engage on an Outside IR35 basis, as opposed to an end client who has decided they will not use the limited company option at all.
The end client who has understood the rules will have set themselves up to be commercially attractive to the talent available. They will likely have access to multiple high quality specialised limited company service providers to choose from compared to the other end client who will struggle to find people to engage to deliver to their needs and potentially have to choose from a lower quality provider base.
This is one reason why it’s vitally important for end clients to start to educate themselves now and prepare for the reform to the private sector rules. Especially with a focus on agreeing how they want to engage with contractors and how they package and shape the requirement accordingly.
Stick or twist?
We mentioned how end clients will initially propose to handle the changes and the reason for this comes from our public sector experience. We have often found that some end clients tend to go through a process on this, they take a hard initial stance and then gradually become more lenient over time; in some cases going in a completely opposite direction. We have even seen some communications sent out and then retracted very quickly. In most cases, where an extreme initial position has been taken, the end client tends to twist and move to a model which keeps the doors open to the highest quality talent that is available on the market.
It is definitely best practice for end clients to take a considered approach on how to deal with these changes rather than having to transition through multiple positions in an already complicated period of change.
Internal working groups
End clients are getting a lot of value by setting up an internal IR35 working group. There are many benefits to having a core team of people with an increased level of knowledge on the subject. This working group can manage the workforce audit programme and agree a process for determining the tax status of the incumbent flexible workforce population, as well as agreeing and communicating a business as usual strategy for when this becomes the new normal from April next year.
Clients reconsidering how they engage
It makes sense to step back and reconsider how you engage suppliers to carry out a task rather than just doing what you have done previously. End clients are increasingly moving into a position where they are asking more questions. For example, they know they need a developer, but what do they need them for? What is it exactly that they need to be delivered, and by when?
Once you start to understand those elements, you can structure the work accordingly; mirroring it to the contract with the service provider will help, giving everyone clarity and some clear objectives or outcomes to work to. This starts to shape the services element. It usually means that rather than simply engaging a contractor for a set period of time, end clients can start to see some further value in the service delivery tracked against specific needs or milestones. Everyone wins. This article explains further how end clients and contractors can start to think differently about how they engage.
Process maps for reasonable care
A vital part of preparation for the changes is to ensure that they have documented process maps in place which can be used by anyone required and should form the process for engaging with a flexible worker. This should be the case regardless of the determination that you reach and will go a long way in providing HMRC if they ever come looking for evidence that you have taken reasonable care in reaching your decision on the of tax status with proof of your process and the steps you have taken to ensure reasonable care.
Flexible worker communication
Communication is hugely important as you go through any period of change, ensuring that everyone knows where they stand. Silence can be harmful at this point, especially to any contract workers who are providing services to your organisation. Even something as small as sending some communication to the flexible workforce to confirm that you are working on a plan around the IR35 changes and will update them shortly, will give suppliers the peace of mind that something is happening behind the scenes if you have not yet made it public. Contractors who are not aware of how a client is looking to manage these changes could look to engage on a project with a customer who does have a clear plan in place. To reduce the risk of that happening a clear communication channel should be opened.
This should be a two way conversation as it’s important that end clients listen to their specialist limited company service providers and understand their needs in this scenario. Normally, a situation can be best resolved when both parties listen to one another and are willing to flex on certain elements to reach the desired outcome.
Don’t just communicate, ensure you offer options
Nobody likes being forced into a position or decision unwillingly. This is why it’s important to ensure you are able to offer a range of compliant options. Once presented with a range of options where all parties are in agreement with the status determination, a fact based decision can be made by the contractor as to how they want to proceed.
Experience is not to be understated
There are some situations where experience adds significant value and the IR35 Reform is one of those. Working with agencies and specialist staffing organisations who have been through this before is massively beneficial to parties throughout the supply chain. Regardless of where you sit, whether as an end client, an MSP or as a limited company service provider, Progressive Recruitment, part of the SThree group of companies are able to support you.
If you have any questions or would like help on anything IR35 related then please fill out your details below and we will be in touch. Alternatively view our IR35 resources page found here.
This document/article is for information purposes only, and should not be seen as providing legal or tax advice. SThree and its family of brands, advises clients and contractors to seek independent legal and/or tax advice, where required.