Way back in early 2017, I was writing about what the IR35 changes meant for the public sector, and other than the fact we’re talking about the private sector now, nothing’s really changed (at least in terms of the legislation; plenty has changed in terms of the market and solutions). Today, I’m answering the same questions for private sector companies as I was for public sector organizations three years ago.
Maybe this article’s headline should have been, “There is a compliant and safe way to procure contractors for services that does not bring them in scope of IR35”… it just didn’t sound as catchy.
The change in legal responsibility for determining IR35 status of contractors is seen as a major threat to big businesses in the UK. So much so that an ever-increasing number of businesses have announced (or have been exposed as having) “all-in” policies. In 2017, I was trying to explain to my mum what was going on and why tax legislation was relevant to me, someone who’s worked in contingent staff management for over a decade. This is when I came up with the “fence story.”
So, how does building a fence save you from IR35 chaos? I’ll start by explaining that it’s an imaginary fence, but that doesn’t make it any less valid. The idea is pretty simple: think about how you would contract for someone to build a fence in your garden, compare it to how you contract for services in your business, and quickly work out if it’s likely your contractors are “in or out” of IR35.
If you need someone to build a fence in your garden, here’s what happens:
- You start by Googling “fence building near me,” get some quotes, and choose your favorite based on whatever’s most important to you, e.g., cost, presentation, or someone you know who’s done the same or a similar good job for you before. Nothing wrong or illegal in that.
- You don’t care if they’re big or a one-man band – that’s none of your concern, so long as someone turns up who knows how to build fences.
- When the fence builder arrives, they bring their own tools, although you may need to provide them with a key if they’re going to let themselves in. You can’t expect them to have their own key in advance.
- You show them where you want the fence and might tell them a bit more about it – like how high or what color you want it.
- You agree to the price and how long it should take to get the job done upfront; if they finish early or late, you pay the same.
- If the builder you spoke to isn’t the builder who arrives, it’s not a problem. Once again, you just need someone who knows how to build fences.
- If they arrive at lunchtime and leave by teatime, you might roll your eyes and tut, but realistically you’ll say sure – but you don’t pay them for half a fence! You wait until the job is done.
- Once it’s built, they come in and let you know. You take a look and say, “good fence,” then pay up. If it’s a terrible fence that is the wrong height and color, you pay nothing and expect them to re-do the work before you pay.
This might sound a bit obvious, but bear with me.
The thing is, what’s actually happening in businesses across the UK is people are hiring contractors but, once they’re onsite, accidentally doing all sorts of weird things, like:
- Calling a fence building company but then providing the hammers, wood, and nails when the person shows up at their house.
- Calling up a mate, even though they’ve never built a fence or even put up a shelf in their life.
- Providing direction on how a fence should be built (hold that wood there, yup, then hammer it just like this) rather than just explaining what it should look like when it’s built.
- Arranging a one-to-one for partway through the day to check their progress and set new goals.
- Expecting them to manage the gardener. Or, if they finish early, asking them to babysit the kids with their spare time.
- If it’s not done at the end of the day, paying them anyway, and then paying them again the next day to finish it off.
I came up with this story over two years ago, and it still feels as relevant today as it did then. Contractor or contracting company, whichever you are – are you contracting in the same way that you would if you needed someone to build you a fence? If you start out by asking that question, you’re on the right path.
I said earlier that, although the legislation hasn’t changed, the market and solutions have. It’s clear to me that the “all-in” approach to IR35 is not the safe route than many businesses think it to be. I understand facing difficulties, such as feeling like you don’t have the time, money, or expertise within your business to review all your contracts and be sure that, if you determine them to be outside IR35, you’re right.
But there is a way, using an application that has both contingent and services modules available, and even within the contingent modules, that you can configure a solution that offers you a route to compliant services procurement outside IR35. There are and will be businesses that realize this and use their tools to continue to procure services safely and legally. If major companies continue to apply “all-in” methodology to services procurement, then the ones that don’t will have their pick of the market. The risk to a business of losing top talent to those willing and able to look past the initial fear of financial penalties for making a wrong judgment is greater than many understand.
So that’s why I’m here, writing again about my fence story. It’s safe to say that deducting tax and insurance from a true contractor’s pay isn’t fair, which is what the IR35 legislation change is designed for. HMRC is looking to end hidden employment and related lost revenue, and everyone can do their bit to help achieve that aim, without costing their business or themselves.
If you are treating contractors like employees, now is the time to change the behaviors or convert them to contingent workforce members. But if you are hiring people to build fences and really letting them do that job, then you can find a solution that allows you to do that.
If you want to learn more about the true cost of “all-in” approaches and the alternative that SAP Fieldglass can offer, register for our webinar on January 22: Alternative Approaches to IR35 Management