September has historically tended to mark the beginning of a busy period for businesses and the engagement of contractors.  However, with increasing competition for talent amidst a shortage of skills impacting certain markets, the way that firms responded to the introduction of new IR35 off-payroll legislation earlier this year could have an impact on their ability to engage talent and subsequently meet their commitments.

At the same time, we have also seen a number high profile HMRC fines issued for IR35 non-compliance in the public sector over the last few weeks. So, is now a good time to review your IR35 approach?

Re-Evaluating the Quick Fix

In light of the pandemic and 12-month postponement of the new IR35 legislation, implementation in April seemingly crept up on a number of businesses, resulting in many organisations taking a “quick fix” approach.

Those fixes included a blanket ban on the use of Personal Service Companies (PSCs) or determining that every worker who provided their services through an intermediary was caught by the off-payroll working rules without giving any consideration to the specific facts of each individual case. The latter clearly does not meet HMRC’s criteria for the use of “reasonable care,” while both approaches effectively remove access to the contingent workforce. This is now negatively impacting these businesses’ ability to recruit as the jobs market opens up and Covid-19 restrictions ease.

The government’s own CEST tool indicates that up to 70% of contractor roles should be determined as outside of IR35. However, Jobfeed market data shows that only 26% of contractor roles are currently being advertised as outside IR35 (w/c 7 June), highlighting a significant discrepancy and a lost opportunity for end hirers to make their requirements stand out in a crowded market.

Why would a contractor choose to potentially take a pay cut and work inside IR35 when companies that have taken reasonable care are offering the same role outside? In closing their doors to skilled contractors who chose to work outside of IR35, businesses with blanket bans, or blanket inside determinations, have effectively cut themselves off from up to 70% of the available contractor workforce.

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Competition for Talent

The latest data from the Recruitment & Employment Confederation (REC) JobsOutlook found that  confidence in hiring is at an all-time high and has translated into recruitment activity. This correlates with ONS data for April to June 2021, which showed that job vacancies were 9.9% higher than the pre-pandemic levels in January-March 2020, with an estimated 862,000 job vacancies posted – a 38.8% growth on the last quarter. In such a competitive environment, certain businesses need to re-visit their stance on contractor engagement, especially with a peak in demand for contractors expected in the autumn.

By taking reasonable care and a diligent approach to IR35 compliance, organisations can include job status on role advertisements and increase interest from the most talented contractors.

Compliance Enforcement on the Horizon

By conducting a review now, businesses will also be able to get ahead of HMRC’s transition from the IR35 “soft landing period,” where HMRC’s focus is currently on educating businesses on how to be compliant, to enforcement. The past few weeks have seen tax bills delivered to the Department of Pensions (DWP) and Home Office following IR35 public sector compliance errors, so it’s easy to assume that IR35 compliance in the private sector will be a key focus for HMRC from early 2022.

It’s also worth noting that businesses who may have outsourced status determinations or passed tax responsibility down the supply chain may also be at risk of non-compliance. It’s therefore vital that, as we enter the second quarter with the new IR35 legislation, businesses conduct a thorough review of their supply chain.

The quieter summer months present the ideal opportunity for businesses to take a step back and review their IR35 approach ahead of a busy autumn. This will not only enable organisations to ensure compliance with the latest legislation, but it will also allow them to develop and put forward the most attractive proposition for contractors in an increasingly competitive jobs environment.

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