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IR35 private sector reforms: IT contractors ‘growing reluctant’ to work for ‘blanket banning’ firms

IT-focused staffing company Ellis Recruitment Group shares its take on how the contracting market is responding to the private sector firms enforcing blanket bans

IT contractors are showing an “increased reluctance” to work for private sector organisations that have a reputation for taking a slapdash approach to complying with the incoming IR35 reforms, it is claimed.

In anticipation of the reforms coming into play in the private sector from 6 April 2021, companies have been rushing to ready their operations to ensure the engagements they have in place with their contractors are compliant with the reworked rules.

Under their terms, all medium-to-large private sector companies will assume responsibility for assessing how the contractors they engage with should be taxed, whereas – presently – this is something contractors are allowed to determine for themselves.

The shift in responsibility is part of a long-running tax avoidance enforcement clampdown by HM Revenue and Customs (HMRC) that is designed to discourage contractors from deliberately misclassifying their end client engagements to minimise their employment tax liabilities.

The tax status determinations are based on the work the contractor does and how it is performed, and – from 6 April 2021 – the end client will need to decide if the contractors they engage with should be taxed in the same way as employees (inside IR35) or as off-payroll workers (outside IR35).

As reported by Computer Weekly, many private sector firms have sought to reduce the administrative burden associated with taking the time to individually assess each engagement they have in place by issuing blanket determinations whereby all of their contractors are ruled to be working inside IR35.

Similarly, other firms responded by introducing hiring policies that prohibited the use of personal service company (PSC) and limited company contractors from April 2021 onwards, as a means of side-stepping the requirement for firms to carry out individual tax status determinations.

Reasonable care

This is at odds with HMRC’s IR35 guidance, which instructs organisations in-scope of the reforms to take “reasonable care” by individually assessing the tax status of every contractor they engage with.

Mark Thomas, corporate sales director at IT-focused recruitment company Ellis Recruitment Group, said firms that take a “blanket” approach to status determinations are likely to find it difficult to attract high-quality IT contractors in the future.

“The result is that we are now seeing an increased reluctance from contractors to accept inside IR35 assignments where there has been no due process in terms of the hiring organisation employing a documented and sensible Status Determination Statement [SDS] process,” said Thomas, in the blog post.

“In a post-pandemic world, we believe that organisations operating a blanket ban approach will struggle to attract and retain the highly skilled contractors needed to deliver business-critical IT projects.”

Between January and July 2020, “a vast number of contractors” saw existing IT projects being put on hiatus and a dearth of new ones being embarked upon, resulting in the market becoming “flooded with previously unseen numbers of contractors without assignments”, said Thomas.

This appears to have been caused by the fallout from the start of the Covid-19 coronavirus pandemic, and resulted in contractors having “little or no choice” but to accept inside IR35 assignments that paid a lot less than the day rates they previously commanded to maintain an income, he said.

Read more about the IR35 reforms

However, since August 2020, the situation has markedly improved, with a “notable increase” in new contract opportunities, which is backed up by data shared by the IHS Markit permanent placement and temporary billing indices, he continued.

This rebound in the number of roles means contractors are becoming less willing to accept roles that pay less, or that mean working for firms that are renowned for not taking due care when assessing the tax status of their contractors.

“This trend will continue to grow as the IT industry comes to terms with the fact that critical IT projects have to continue,” he added.

“Organisations [that] are not operating in the spirit of the legislation and blanket banning outside IR35 contractors by not operating a Status Determination process will alienate themselves from highly skilled contractors. Organisations will then not utilise those niche contractors required to deliver their business-critical IT projects.”

Looking ahead, Thomas said his company’s view is that the market will rebalance itself in time, as end clients get more comfortable with their IR35 responsibilities and realise their approach to complying with the reforms might be putting some people off wanting to work for them.

“We believe over time the market will settle down with genuinely outside IR35 assignments becoming more prevalent as the commercial world rebalances back to the normal market forces and demands,” he co.

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