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IR35 private sector reforms: IBM joins list of enterprises applying blanket ban to PSCs

Tech giant IBM has notified its personal service company IT contractors that they must switch to PAYE terms or use umbrella companies from the end of March, as the private sector races to achieve IR35 compliance

IBM has set out plans to phase out the use of personal service company (PSC) IT contractors from its workforce to ensure compliance with the incoming IR35 reforms, Computer Weekly has learned.

The organisation is understood to have told its PSC contractors they must re-engage with the organisation on pay-as-you-earn (PAYE) terms or via an umbrella company by the end of March 2020 if they want to continue working for the company.

According to contractors working at the company, who spoke to Computer Weekly under condition of anonymity, the company began formally briefing its personnel about the changes on Monday 13 January.

“They are taking the path of least resistance and risk,” one contractor told Computer Weekly. “They want all contractors to switch to PAYE or umbrella schemes from April [as they feel] this is the best approach, instead of assessing [every contractor’s] status [individually].”

Umbrella schemes are typically used by contractors who want to outsource many of the day-to-day business processes associated with running a limited company or PSC, while also providing a means of ensuring participants are compliant with the IR35 rules.

Any work the contractor does will be paid by the end-client directly to the umbrella organisation, which will extract their fees and pass on the remaining sum as a salary to the individual, who will be liable to pay PAYE and national insurance contributions on the income they receive.

It is understood that among the contractors affected by the decision will be software developers and engineering staff.

“Many of us supply expertise that IBM does not have lots of in-house,” the contractor continued.

Under the terms of the IR35 reforms, which come into play on 6 April 2020, all medium to large private sector companies must assume responsibility for determining how each individual contractor they engage with should be taxed.

At present, it is up to the contractors themselves to self-declare if the nature of the work, and how they perform it, means they should be taxed in the same way as off-payroll employees (outside IR35) or as permanent, salaried workers (inside IR35).

In organisations where a large number of contractors are engaged, several high-profile organisations have opted to do as IBM has and side-step the need to individually assess the tax status of each contractor they use by opting to phase out their use of PSCs altogether. Companies in this group include Lloyds Bank, HSBC, Barclays Bank and pharmaceutical giant GlaxoSmithKline.

“Given that changes can be managed, [phasing out the use of contractors] would be a costly, knee-jerk and needless reaction to IR35 reform”
Seb Maley, Qdos

The start of IBM’s contractor briefings follows two months of the company’s project managers telling them a decision on the firm’s IR35 compliance strategy would be forthcoming in due course, it is further claimed. 

“We are still weighing up the risks of staying on, but some are leaving,” a contractor claimed.  

Computer Weekly contacted IBM for clarification on the situation and received the following statement in response.

“IBM works to ensure compliance with all applicable laws and in line with business needs,” a spokesperson for the tech giant said.

Speaking to Computer Weekly, Seb Maley, CEO of contractor tax consultancy Qdos, said firms such as IBM, which view phasing out their use of contractors as a fast-track to IR35 compliance, could end up losing out in the long run.

“Not only will these companies miss out on the skills and flexibility enjoyed when compliantly engaging contractors outside IR35, transferring contractors onto the payroll and engaging them in this way is an expensive exercise – both in the short and long term,” he said.

“Given that changes can, in fact, be managed, this approach would be a costly, knee-jerk and needless reaction to IR35 reform.”

Read more about the IR35 reforms

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