IR35 reform: How consultancies should be treating their contractors, if retention is the aim

A post on LinkedIn over the weekend “strongly advising” all limited company contractors to join umbrella companies ‘if they want any chance to get work from April 6th’ has caused quite the commotion.

While there are issues with the post in question (“nonsense” is among the replies it has received), the commotion is partly due to confusing and inadequate IR35 guidance from HMRC for off-payroll workers and those who engage them -- such as consultancies, writes Elizabeth Kent, chief operating officer at Bishopsgate Financial.

Noble intentions, gone awry

Even though last week’s Budget 2020 gave the green-light to the April 6th IR35 framework, HMRC’s guidance is such that the calls for the legislation to be reversed are still ongoing.

My stance is that while the legislation has noble intentions, to clamp down on ‘disguised employment’ where contractors pay less tax than full-time employees so the government taxes them as employees but without the rights of employees, risks making the UK less competitive. 

In fact, the contractors affected (or considered to fall within the new regulations), will have to pay the same tax and National Insurance contributions as full-time workers, but they will not receive the same benefits. As if that wasn’t bad enough, because the reformed IR35 legislation holds the end-user companies responsible and liable, these end-clients – in a bid to avoid ending up on the wrong side of the legislation with a heavy fine – are banning PSCs outright.

It’s here that the post on LinkedIn, referred to at the outset, might seem to start to make sense. But it is precisely because HMRC’s guidance is ambiguous that there is commotion in the contracting community, as in place of unambiguity, businesses have moved in and decided to apply bans on contractors, rather than take a case-by-case approach.

This ‘cease and desist’ approach to PSCs will not only discourage valuable experts from providing their skills or services on a temporary basis, it will also remove a much-needed agile workforce from the labour market. Contractors typically have experience gained at different organisations, and these people bring a wealth of knowledge and ideas. They are currently available ‘on tap’ to plug interim challenges, solve problems and instigate new systems. 

The win-win heading for a ‘lose-lose’

Compounding the situation, these blanket bans on limited company providers are not only impacting independent workers, but they are also hitting many recruitment and management consultancies -- those whose business model depends on supplying PSCs to the end-user organisations. These consultancies frequently have niche offerings, where they provide highly specialised talent, often at short-notice, to big players. Before this unwieldy reform of IR35 in the private sector, this was a truly ‘win-win’ situation for all. 

Well, quite at odds with the LinkedIn post, we believe there is still space for genuine contractors and top-quality consultancies. Recently, it’s been indicated by the government that companies won’t have to pay penalties for IR35-related errors in the first year, signalling a ‘light touch’ approach by HMRC, initially. While this doesn’t solve things, it at least gives firms some time to adapt and streamline internal processes for hiring PSCs. 

As a consultancy in this space, we’d like to outline what we believe it’s important that the likes of us should be doing with the likes of ContractorUK readers – the skilled contractors or PSCs.

How consultancies should be treating contractor consultants

First and foremost, recruitment and management consultancies need to ensure their general approach is one that looks after their contractor consultants, which means treating them as assets. It is essential to recognise their experience and ideas, so care is needed.

Secondly but related, it’s crucial for consultancies to address the concerns of a PSC worker. While the financial reward is necessary in their eyes, it’s also massively about flexibility and about being able to work when and where they want to work.

Next consultancies, look for positive developments you could offer. By this we mean benefits packages which may include income protection, pension scheme and private healthcare. It is also beneficial if consultancies look at their contract/PSC workers’ training and development. We think consultancies should make it easy for their consultants to keep their skills sharp, thanks to professional development provision. Through such carefully structured offerings, the PSC can come to know that the consultancy is invested in their future and not just focused on present profits.

Similarly, staffing and management consultancies should step back to consider that contracting can be an isolating experience, especially with the April 6th legislation almost upon us. So we believe it’s important to create a professional community feeling, potentially leverage using a social or supplier platform for the ‘virtual’ team. Remember consultancies, loyalty cuts both ways. 

Final thought

So quite contrary to the ‘all PSCs must use umbrellas or perish’ slogans, we believe there are many ways that consultants can continue to work on an interim basis, and client companies can have that flexible resource. That will usually involve some sort of ‘on-demand’ employment contract, run through the consultancy. We consultancies need to work with end-client organisations and act as consultant advocate to provide opportunities -- full-time or otherwise -- that reflect the way consultants want to work, which also comply with the client’s contracting restrictions. We think it should be remembered these contract professionals don’t want to be tied into a conventional career; they love the freedom they have to travel, do different things; work for different people. 

Ultimately, and being realistic, someone in the supply chain will likely lose out under this new and incoming IR35 framework. Consultancies need to be careful that it is not always the consultants because these prized workers can take their labour in-house or to a competitor.