The role of freelancers, entrepreneurs, and agency workers has become much more important to the tech industry. The economic rollercoaster of the coronavirus has forced companies to rotate business models at unprecedented speed, either to meet an almost unmanageable need for their services, or to restructure and adapt in response to lower sales. . Both scenarios mean tech companies need skilled people right away, and in most cases it means turning to the UK freelance pool. The IR35 delay made this task much easier. Without the added complexity of hiring processes or the financial deterrent of certain roles, technology companies can access talent with relative ease. However, the legislation backlog won't last until April 2021. To ensure they continue to have access to the most talented freelancers, here are some of the practical steps tech companies need to take in the next 12 months to prepare for IR35 when arrive:
Make sure hiring managers understand the difference between IR35 "internal" and "external" roles
Currently, private companies do not need to determine the IR35 status of roles. However, when IR35 goes into effect next year, they will have the legal responsibility to decide which roles are "in" (NI and PAYE tax deductible) or "out" of IR35. There are three basic principles to determine if a role is inside or outside the IR35. If an entrepreneur has a role that could be performed by another person with similar skills, this role does not fall under IR35 (right of substitution). The role is also left out of the IR35 if the client does not delegate the daily tasks of the employer (supervision and control). If the client provides the contractor with a file to carry out a specific project but is not obligated to provide other work (and the contractor is not obligated to accept other work), then the role does not fall under IR35 (mutuality of obligation). An entrepreneur must only meet one of these requirements for the role to not fall under IR35. For example, a program manager might be hired to plan and direct multiple project workflows to implement a major enterprise software platform. The role would not fall under IR35, if you could demonstrate that the skills required for the role could be found in another professional with similar experience who could stand out. If, like many project-based roles, you had been given a long-term goal to achieve, but not explicitly explained how to achieve it, then the role would be left out of IR35. In the same way, the role would also be left out of IR35, if the work it carried out meant that it could function autonomously on a daily basis, without being delegated to it. Here it is essential not only to have the right contracts, but also the right governance processes to ensure management by objectives rather than by daily production.
Implement an individual status assessment process
Several tech companies have recently come under fire for lumping all of their subcontractors (some of them over 3000) into the internal IR35 category, even though many of these roles are seen by tax advisors as not in accordance with the legislation. This meant that many of these entrepreneurs would have been unfairly classified as employees for tax purposes, with NI and PAYE deductions on their earnings without the benefits of being a company employee. This got them blacklisted from the UK talent pool. With the emergence of a number of sites denouncing perceived unfair IR35 practices, technology companies need to ensure they have an individual role evaluation process, rather than applying blanket bylaws. This will be particularly important to secure talent next year, as the country enters a post-coronavirus recovery phase and companies pivot again to respond to a new market landscape. It is the contractor's responsibility to pay the employee's national insurance and income tax if the role they are in is considered part of IR35 (but it is the company's responsibility to determine IR35 Status for this role). While this shifts payroll and accounting teams away from the responsibility for tax relief to internal IR35 roles, they (and hiring managers) must have an understanding of this area. If an employer has been hired through a recruitment consultancy, it is their responsibility to make their tax deductions. Some recruiting agencies offer candidates who are under the law the chance to join their roster. By placing the contractor on an agency's payroll for the duration of the assignment, the agency pays the HMRC employer's NI and apprenticeship tax on behalf of the contracting organisation. These costs will be added to the agency fees billed to the client. It is the same if an entrepreneur operates through a parent company; the umbrella company is responsible for paying any applicable taxes. Some contractors (especially at the upper levels) have their own limited liability company that processes the full payment for the assignment. In general, they use an accountant to pay the necessary tax deductions. Tech companies should not view IR35 as a barrier to hiring freelancers. In fact, it can and should be used strategically, for example by providing casual workers with the same benefits as employees for internal IR35 roles. By implementing it fairly, communicating it well, and integrating it into the company's talent strategy, technology companies will find themselves accessing the best talent on the market. Paul Wright is CTO at Odgers Interim