IR35 private sector reforms: Examining the infrastructure challenges it poses to umbrellas

In this guest post, John Whelan, CEO of cloud-based accountancy software provider My Digital Accounts, sets out why umbrella companies should be seizing on the incoming IR35 reforms in the private sector to revamp their infrastructure and embrace automation.

The gig economy is being thrown into chaos as the IR35 rules tighten in the private sector, triggering a major shift in how the temporary labour market operates. The new off-payroll rules are already reducing the number of contractors using limited company vehicles as many large companies, including BP, Barclays and GSK, have declared blanket bans on working with contractors operating through limited companies.

Instead, companies are opting for the easiest route to IR35 compliance by using payroll intermediaries such as umbrella companies, rather than thousands of contractors operating through their own limited companies. It is of course possible that overly conservative “decisions” are actually being taken for costs cutting and not for compliance reasons.

Companies choosing to sever the direct contractual link with limited companies will force up to half of the UK’s 800,000 contractors to abandon their individual limited companies, causing a spike in demand for umbrella companies and other ‘on payroll’ services.

While additional customers are an opportunity to increase revenue, many umbrella companies will be held back by their current infrastructure and technology stacks, which may already be struggling under the weight of their existing workloads.

Protecting against IR35-related system failures

Many umbrella companies are shackled to separate software systems for onboarding, payroll and accounting. Poor integration between these systems means manual labour is relied upon to transfer data between each application.

This often causes complications due to multiple contractor records distributed across the tech stack being reconciled using manual labour, usually assisted by the accountant’s trusty old friend – the Excel Workbook!).

This is an out-dated way of working and places enormous pressure on umbrella companies, particularly at peak workloads. The clumsy chain of communication currently holding umbrella companies’ IT systems together will rapidly break down as they experience a sudden rush of contractors due to IR35.

If umbrella companies want to accommodate the surge of new contractors signing up, they will need to break free from their restrictive IT architecture.

Third-party platforms with duplicate databases at varying levels of accuracy shouldn’t be kept in isolation from each other. Core data sets need to be well-maintained to prevent errors from creeping in. Ageing IT systems should now be assessed to uncover any concealed costs. These may require more staff to support them as more temporary workers are onboarded, inflating overhead costs and limiting profits.

Automation to manage on-boarding

To avoid being held back by traditional software silos, umbrella companies need to refine their IT infrastructures to an automated model which blends onboarding, payroll and accounts into one central system.

Having a centralised system with a single database also minimises the risk of human error. This keeps the core data set up-to-date and efficiently streamlines payroll operations for both current and additional gig-workers. Using one database across all critical payroll functions allows umbrella companies to streamline time spent migrating contractors. Using systems with comprehensive API connectivity may be a decent halfway house in the short term.

The up-front cost of the technology that combines these critical functions may initially seem high, but the benefits of upgrading to an integrated IT system is worthwhile and long-lasting. When comparing the weekly labour hours needed for bank matching and reconciliation, manual labour is quickly revealed as the weak link causing business costs to rise.

Umbrella companies should look to cope with the inevitable influx by accurately recording and, where possible, automating IR35 decisions, directly linking these to a contractor’s payroll or limited company record.

Combining technology systems will free employees from repetitive tasks and make managing contractors an efficient process. An integrated tech stack then makes scaling to meet capacity simple by facilitating and recording quick, definitive decisions on IR35 for each assignment.

Automated IR35 decisions will be particularly beneficial as many contractors may secure several contracts a year and each one may require individual IR35 assessments. Eliminating manual operations traditionally needed to complete each individual IR35 assessment transforms an overwhelming amount of work into a simple and manageable process.

Combating IR35 infrastructure challenges

With a complete and accurate record of historical contractor payments, everybody in the supply chain can rest at ease knowing any future HMRC enquiries, which can be launched up to five years later, can be handled with ease and accuracy.

While IR35 is bound to bring chaos to the private sector, umbrella companies can use the new off-payroll rules to their advantage by upgrading to an integrated IT infrastructure which removes manual processes.

By breaking ties with current IT infrastructures which binds them to an outdated way of working, umbrella companies can embrace new systems which allow them to effectively scale. Being able to match demand is particularly apposite when dealing with the inevitable influx of new contractors following IR35.

Employees no longer need to be a slave to manual processes. Instead, they can be empowered by technology to better support contractors heavily affected by the IR35 reform, focusing their attention where it matters most.

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