For many companies across the UK adjusting to the new IR35 rules has been quite confusing. IR35, also known as off-payroll working rules, took effect from 6th April 2021. It was already operational across the Public sector (from 2019) and is now in effect for medium or large sized companies within the private sector.
What Does IR35 Even Mean?
IR35 stands for ‘Inland Revenue 35’, which was the name of the press release that first announced the anti-tax avoidance legislation in 1999. The correct term is the Intermediaries Legislation – the contractor’s limited company being the intermediary.
But What Does It Really Mean?
The tax liability is now on the company employing / using the contractor’s services. Which means that businesses must understand and apply the government tests to verify the employment status of all workers in their business. Workers who are now deemed as employees will fall under the usual HMRC tax rules. This means that many skilled workers previously working as a Ltd company contractor and making tax savings as a result, will end up paying full PAYE and NI contributions.
So What Are The IR35 Implications Beyond Tax?
According to the Federation of Small Business there are 6 million private sector businesses in the UK of which 4.6 million have no employees. Some of these individual contractors will inevitably fall outside of IR35 and will continue to offer their services on a consultancy basis.
Many of the contractor population, are highly skilled workers choosing the Ltd company contractor route as a preferred lifestyle choice. Enabling the ability to generate financial security in return for their skills and knowledge. Although contractors work in many industries such as the creative industries and IT, the Public Sector, Finance and Consultancy. There is still a large concentration of such workers in the Construction and Engineering sectors.
As long ago as 2014, the BBC reported that the average age of engineers in the UK was 54. And a 2019 report from Engineering UK suggests a shortfall of between 37,000 – 59,000 Engineers each year. So with many engineers choosing to stop work or retire, and not enough engineers in the first place, IR35 is going to compound a skills shortage which already exists.
IR35 does not mean that temporary or short-term skilled workers cannot be engaged by a business. As long each role is assessed prior to advertising, and the role falls outside of IR35, contractors can still be employed.
There is an opportunity to ensure that knowledge is retained with the workplace. Concentrating on developing key talent within the business, rather than investing heavily in contractors who are not invested in your business.
Our blog Six Reasons Why Hiring a Student Can Support Succession Planning talks about ways in which students, graduates and post graduates might be a solution to the widening skills gap caused by the exodus of skilled workers prompted by IR35.