How have the IR35 reforms changed business

When the off payroll working regulations (IR35) were postponed by a year to April 2021, it provided the UK with the opportunity of a further 12 months to get organised. Already, there were concerns about the potential impact on both individuals and organisations and the uncertainty of how COVID-19 could affect the market only heightened tensions. The government decided to delay the roll-out by a year, giving clients and contractors more bandwidth to figure it out and the market to stabilise. Now here we are, more than a year on, the regulations implemented. But how has IR35 affected the contingent worker market?

What is IR35?

The IR35 ‘off payroll’ working regulations aim to ensure that those who work through a personal service company (such as their own limited company) and work in a way that would make them an employee of the client if paid directly, are subject to statutory deductions as if they were employed. The legislation has been active since 2000 but was reformed in April 2017 to put the onus for determination on the client and was specific to the public sector only. After a year’s delay due to the COVID-19 pandemic, the reform was extended to the private sector as of April 2021. 

Blanket bans haven’t been so broad

According to two separate, independent studies, around one third of contractors are currently engaged on contracts ‘out of scope’ of IR35. This is a different landscape to what we saw in 2020 where the more favoured approach was a lack of engagement with PSC or Limited Company workers. The reform delay to 2021 may have given companies more time to prepare for the rollout and to work in partnership with their contingent talent pool, supported by the explosion of businesses that were created to support clients with making status determinations. One 2020 study found that less than a quarter (23%) of in-work contractors were working at clients that had imposed a ban on PSC workers.

Carrot or stick?

Even with more ‘out of scope’ opportunities than previously thought, some contractors are still resistant to the changes. 80% of contractors that have been determined as inside IR35 are actively looking for a new client, meanwhile 50% of contractors plan on challenging their determination, meaning a likely rise in disputes. This has the knock-on effect of creating additional workload for organisations as they now manage the ‘back-end’ of status determinations in addition to the original decisioning. 

How has this affected contractor movements? According to a December 2020 study, 65% of contractors planned to avoid contracts ‘inside’ IR35, while 69% were prepared to increase their rate for an in scope role. Meanwhile, interesting research from IPSE found that almost a quarter (25%) of contractors were planning on looking for contracts abroad, 17% were turning to permanent roles, 11% were going to retire in the next year and 12% planned to stop working altogether. 

While this may be extremely concerning in the skill scarce digital economy – of which there is a significant contingent population – there are opportunities. One study found that those with niche skills were twice as likely to find a contract outside IR35, which may well encourage contractors to upskill into more scarce skill roles. This kind of skill mobility may well change how we use contractors in the future.

How has the pandemic changed IT contracting? 

The rollout of the IR35 reform to the private sector coincided with the COVID-19 pandemic. Remote working aside, one of the biggest changes to working habits was uncertainty. Over the last eighteen months, businesses have been required to scale their workforces up and down to cope with the turbulent market and volatile economy. And what’s one way to bake flexibility into your business model? Contractors.

Even though many organisations responded to the early stages of the pandemic by reducing their contractor use, 32% of businesses took to replacing full-time employees with contractors to reduce costs and improve scalability in 2020. As restrictions eased in early 2021, many organisations ramped up hiring again as the pandemic accelerated digital transformation and tech projects placed on hold in 2020 went live again. As expected, IT contractor demand soared to a 23-year high in May 2021. 

Contingent-focused workforce models, like Managed Service Provision (MSP), are gaining popularity as businesses ramp up their contractor use. At the same time, Employed Consultant Models (ECM), which emulate contracting with experienced hires ‘loaned’ to clients for fixed periods of times, and Statement of Work (SoW), where experts work on set programmes with fixed deliverables, have also grown in demand as alternative workforce models for temporary talent. 

What should you do if you’re concerned about your contingent talent?

The IR35 reform came into place in the private sector on 4th April 2021, so your workforce should already be compliant. However, if you are concerned about access to contingent talent and how IR35 may have affected this, we can help. Lorien is a specialist technology, digital and professional talent solutions provider, with over 40 years’ industry experience. We’ve seen the talent solutions market transform completely over the last five years, and we’d be delighted to talk you through the latest thinking in the space – including alternative talent models like SoW, how to identify and build your optimum source mix, and how to attract, engage and retain your contingent workers in a competitive market. We also provide an IR35 service that includes support from IR35 expert and expert support in building, promoting & transmitting your contractor value proposition – A key tool in cutting through the noise of competing opportunities to access the best talent in the market,

Reach out to me for more information on creating a high-performing contingent workforce programme in 2021.