IR35: Is it a driver to extend your firm’s use of onshore services?
HM Revenue & Custom’s (HMRC) new tax legislation on contractors, also known as IR35, will come into force on 6 April and many employers have already acted. Mark Hunter, Director at Williams Lea, explains how onshoring can alleviate the inevitable cost burdens of IR35.
IR35 is the latest HMRC crackdown that’s causing major shockwaves across the private sector in the United Kingdom. Whereas previously, self-employed contractors enjoyed the benefits of tax breaks by working under their own limited companies, from 6 April 2020 new rules state that they could now find themselves paying the same level of income tax and national insurance contributions (NIC) as full-time employees, meaning up to a 25% reduction in their income. To mitigate the risk of HMRC action and legal costs, this has encouraged many large employers to put a blanket ban on ‘outside IR35’ contracts. As a major employer ourselves, we know how much of a headache this can be as businesses who take this path expect increased costs and struggles with recruiting as contractors increase their charges to counteract the tax and NIC increase.
To put this into perspective, according to the HMRC, around 170,000 people providing work through a limited company might have to pay more tax, generating an additional £3.1 billion in additional tax revenue. This will affect up to 60,000 medium and large private sector organisations as well as 20,000 recruitment agencies and other intermediaries that supply staff, such as ourselves. This can give you an idea of the scale of change that employers, agencies, and suppliers must prepare for.
How to turn the burden into an opportunity
IR35 is another reason why we are seeing many businesses leverage the operational efficiencies and cost effectiveness that further onshoring can bring, especially in those business functions that have a high proportion of self-employed contractors.
According to the latest data from the Office of National Statistics, there are approximately 140,000 self-employed staff working in administrative and secretarial roles in the private sector (as at 30 September 2019) and some of those workers will need to be assessed as to whether they fall inside IR35. We are therefore seeing businesses looking to extend their scope of outsourcing to include these functions and to employ third party onshore suppliers to achieve the following benefits:
Providing a reactive and scalable workforce for non-core activities, allowing your business to flex through volume peaks and troughs.
Accurate workforce data
With an outsourced workforce for non-core tasks, companies can maintain core headcount numbers and manage talent to ensure a high-performing team that can focus on core business activities.
Mitigating risk from legislation
IR35 has proven to be a major challenge for many businesses. As a rule, outsourcing places the onus with the provider, meaning companies can reduce the time, money, and effort of having to cope with IR35 and future legislative requirements, enabling a focus on key business initiatives while the provider handles the structural and administrative heavy lifting that comes with changes in legislation.
There’s no disputing that IR35 is another hurdle that will affect many businesses across the United Kingdom. However, it’s another reason why many are now seeing the advantages of using third party providers to manage departments with a large proportion of contractors. Starting with the non-core functions, which are still vital in any company, can be a quick win.