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In-out, in-out – the IR35 hokey cokey

Written by: Neil Lupin is managing partner at Green Park Interim & Executive Search
Published on: 6 Oct 2022

Last week’s R&R page outlined the legal changes should the recently announced IR35 reforms become law, so I won’t labour those. After all the changes in 2017 I’m surprised to once again be writing about IR35 so soon. Even my phone is fed up of it – I can’t type ‘I’ anymore without predictive text bringing up ‘IR35’ as the first option. Five-and-a-half years ago we went live on the biggest changes in IR35 since its inception in 2000, and that system remains in place for now. The end client determines whether you’re inside or outside IR35 – ie working via an umbrella company or via a limited company (PSC). Numerous local authorities have a blanket ‘inside IR35 only’ approach and many interims won’t consider roles inside IR35 because the cost of sale is higher. From 2017, for roles inside IR35, it was no longer the individual’s responsibility to pay the correct tax – that control was handed to the end client.

Come April 2023, the system reverts to its pre-2017 structure. Presumably the concept of ‘inside’ or ‘outside’ IR35 will disappear, as potentially will the use of umbrella companies. The taxation structure on individuals paid via umbrellas is more onerous than under PAYE, and pound for pound they’re probably 23-27% ‘worse’ off in terms of their net position than their counterparts earning the same gross day rate via a PSC. These changes only impact hires that after April 2023 would be made inside IR35 – those holding roles that might otherwise be considered as employment, such as office holders or vacancies.

So for now do we wait to see what happens? I’d suggest not. While the system isn’t changing for another six months, the drivers around the market will change. We know that it is already heavily candidate-led and with demand outweighing supply, that dynamic is unlikely to change. It is not likely to get much easier to recruit just because the regulations are changing. Cheaper possibly, but I’ll come back to that.

In 2017, every single contract in place was renegotiated. I remember vividly how, within minutes of the HMRC CEST tool going live, I was receiving status determinations. Prior to the go-live date, we had been speaking to clients and candidates about this for months, getting them ready for the changes. I believe this time it should be no different.

We know that most contracts start as between three and six months, meaning in theory that anyone starting an assignment now inside IR35 might be reasonably expected to have finished that assignment before the regulations change. The reality though is that most contracts extend once if not twice or more – both because it is so hard to recruit permanently and also because clients tend to hang onto good interims longer than expected. I believe hires made from now on that currently fall inside IR35 ought to be negotiated so both parties are clear on what the cost and structural implications would be after 6 April as well. Not only that, but I think all parties have a responsibility to determine what the implications might be for any contractors currently operating inside IR35 in existing contracts that could in theory extend beyond April.

Of course there are plenty of unknowns as yet and these things need to be factored in. What will happen to umbrella companies from April? Will they simply take on no new customers? Will local authorities seek to keep a distinction between inside and outside IR35 contracts even if HMRC no longer determines a difference and hands that responsibility back to the PSC? What will happen as we get close to April and clients want to hire inside IR35? I suspect they will have to negotiate two distinct phases to a contract – one up to 6 April, and a second, probably at different rates, from 6 April.

Which brings me to the ugly point of price and renegotiation. We know the cost of sale for the individual of taking a role inside IR35 is about a quarter higher than for those outside IR35. Having said that, there is vastly more work available inside IR35 so candidates have to decide whether to take on less work at a higher net rate or more work at a lower net rate. Despite this, the pressure on rates in a candidate-led market is upwards with candidates increasingly expecting market forces and cost of sale to be reflected in their headline day rates. At the same time, many clients are of the view the increased cost of sale should be borne by the individual.

So what will happen to roles inside IR35 after 6 April? There are a number of possibilities, all of which should be considered and indeed factored in to any negotiations taking place in advance to ensure continuity. Candidates will expect to be able to revert to using a PSC from 6 April even if their role is currently deemed inside IR35. That of course may not be palatable to the end client. And even if it is, clients will know the cost of sale for that individual will be lower via a PSC. Just as many inside IR35 rates went up in 2017, it is entirely possible that rates will adjust for the lower cost of sale in 2023. Candidates may well expect to retain their headline day rate and for this reason I believe it is crucial for there to be two negotiations that take place – one for the existing regulations and a second for what we understand to be the regulations that will prevail from 6 April.

Most of us would probably not bet against things changing in the meantime, but based on what we currently know, it would be wise for all contracts currently inside IR35 that are expected to be in place in April to be negotiated in advance. It’s really no different to being clear on the changing expectations around issues such as hybrid working. Setting out the parameters in advance can only be helpful. 

Neil Lupin is managing partner at Green Park Interim & Executive Search

Tel: 07967 826026