What lessons for April 2021 did we learn from IR35 preparations in 2020?
The changes to IR35 are due be introduced in April 2021 and are set to have a large impact on the UK contracting market. The changes were initially scheduled to take place in March 2020 but due to the global pandemic they were put on hold. The delay has provided contractors and companies extra time to ensure they were prepared for the change in how a contractor’s IR35 status will be determined.
Companies were already preparing for the initial April 2020 deadline and through working with numerous life sciences companies, we have been able to see a range of approaches. As 2021 quickly approaches and companies need to revisit their IR35 preparations, we want to share some of the key lessons we learnt from 2020.
What are the changes?
The legislation itself is not changing, however, the parties responsible for assessing a contractor’s status and deducting/reporting the tax has been revised.
Under the current legislation:
Where a contractor is operating via their own personal Service Company, they are responsible for making the Status Determination and confirming if they are in or outside of scope of the current IR35 rules. The liability sits with the contractor.
Under the revised legislation:
The client will be responsible for assessing and providing the Status Determination on whether the contractor falls within scope of IR35. The liability would shift to the client who will be responsible for communicating this decision down the supply chain until it reaches the “Fee Payer” i.e. the entity paying the PSC, which is usually the agency.
Once a status determination has been received by the Fee Payer, they are responsible for applying this decision. Where the assignment is out of scope, the Fee Payer will pay the PSC gross and the contractor will be responsible for paying the correct tax to HMRC. There the assignment is in scope the Fee Payer will be responsible for:
- Deducting PAYE and NICs and paying the PSC the NET value
- Paying the Employers NICs
- Reporting the deductions made via Real-Time Information
Lessons learnt
Having worked with a broad range of biotechnology, pharmaceutical and medical devices companies and CROs throughout the preparations for IR35 in late 2019/early 2020, we had a unique insight into the various methods, successes and pitfalls in the planning. These are some of the core lessons learnt from 2020:
A Team Approach
Many companies had delegated one core lead for their IR35 preparations, but the ones that saw a more successful preparation process where those that had multiple internal stakeholders involved.
“It’s definitely not too late to start making changes and to start implementing what has to be done and one of those key things is undoubtedly ensuring that you have a robust IR35 project team internally, where everyone within that project team understands what their responsibilities are. In terms of the project team, we found out very quickly that it’s too much for one individual to take on themselves…”
Elliot Tiffin - Vice President of Global Contract Services at Hobson Prior
Communication was a core influencer in determining successful preparation. Knowing how many contractors will be impacted, contacting each section of the supply chain and ensuring all parties were aware of their responsibilities and decisions being made should not be underestimated.
It was the companies that were willing to invest time and resources to these processes and engage their contractors, consultants and their peers in the market.
“From the approaches that were good from our clients and the industry, in particular, were those that were open and transparent and shared not only their concerns with us, but with each other, whether it be forums or conferences – those that were open to their concerns and then their solutions definitely fared better than those that didn’t.”
Elliot Tiffin - Vice President of Global Contract Services at Hobson Prior
Communication channels crossed
With many variable unknown and several businesses at different stages of their preparations, there was a lot of rumour regarding how contractors may be impacted in comparison to their peers within the life sciences contracting market. As is the nature of contracting, there is a level of separation with the end client they are providing services for and contractors, which led to contractors questioning their recruitment agencies, different stakeholders within the business as well as their peers to try and find answers. Without a clear line of communication, this caused problems, as described by Interim Biometrics Team Lead, Mike Masoomi:
“Lots of contractors are used to liaising directly with their consultant or their agency that they go through. Others have a more direct line of communication with their line manager or in some cases other stakeholders in the company that they’re contracting with.
"And what I experienced last year is that a lot of contractors are having half of their conversations internally with the client that there providing services to and the other half with us and that causes a lot of issues and what we need to make sure in 2021 one is that the agency the end client and the contractor all set a clear channel of communication so we can all reach the same objective and that is that all parties are happy and well informed.”
Michael Masoomi - Team Lead for Interim Biometrics Recruitment at Hobson Prior
This lack of consistent communication ultimately led to frustrated contractors, who were unclear if they were now in or out of scope, how this would impact their income and livelihoods, as well as how and when they would receive this information. This was particularly frustrating as more companies revealed their plans and contractors engaged within the market were receiving mixed messages from their industry peers.
Blanket statements cost more than they saved
The biggest area of contention we saw in the IR35 preparations in 2020, was how companies dealt with determining the status of their contractors.
In order to save time, some companies decided to use a blanket approach of defining all their contractors as in scope, however, as we witnessed first-hand, this often caused more problems than it resolved.
“With the disputes process, one thing that we did see and that we’ve learnt from the process last year, was that the organisations that made blanket determinations actually received more disputes than any other that we saw so retrospectively the idea of maybe saving time, worked as a hindrance and actually cost them time net in the process when you look at it as an overall.”
Elliot Tiffin - Vice President of Global Contract Services at Hobson Prior
We saw more disputes regarding status determination from contractors working with companies that had used this blanket approach. Whilst this was a helpful test for the 45-day review process, the time and resources required to deal with the influx of unexpected appeals from contractors challenged the initial reasoning behind taking a blanket statement approach. As well as an increase in disputes, there were other impacts to this method of determining all contractors as in scope of IR35.
Reputational impact
Another unexpected backlash from companies that took a blanket approach for determining contractor status under IR35 was the impact this had on their reputation across the UK life sciences contracting market.
“The organisations that made blanket determination […] actually started to deter candidates from applying to contract projects there as they wanted to ensure that if they did have the possibility of operating outside of the legislation, then they at course could.”
Many contractors we worked with were concerned that the determination process was being transferred from their control, so it is unsurprising that there was frustration when they were not being included in the determination process.
“What I found most interesting was that it wasn’t just contractors that disagreed with the determination, it was actually contractors that didn’t feel listened too or valued and that was the biggest reason for them looking elsewhere.”
Michael Masoomi - Team Lead for Interim Biometrics Recruitment at Hobson Prior
There are numerous factors that can impact a status determination position and with contractors’ payment on the line, unclear communication and neglect complicated many previously amicable working relationships.
Opportunity to impress
Conversely to the above, Hobson Prior found that the companies that engaged their contractors throughout the process and ensured clear and timely information raised their profile within the industry.
“Those organisations and those that we partnered with that were really open and transparent to help and that consulted with their contractors on a one-on-one basis actually became hubs for talent. People that were in the industry recognised those organisations as ones that did treat IR35 with the seriousness that it deserves and then they wanted to work for these companies.”
Elliot Tiffin - Vice President of Global Contract Services at Hobson Prior
With a lot of uncertainty and rumours across the life sciences market, organisations that could provide an organised process and engaged contractors were more appealing and many contractors we worked with were actively seeking opportunities at companies which has a robust IR35 plan in place.
Adapting for 2021
The core lessons we’ve seen from the 2020 deadline preparations revolve around one core aspect of the changes to IR35: making status determinations.
From this, the advice we’ve been emphasising with our life sciences clients with contractors in the UK is:
- Ensure your IR35 team has the resources and support needed
- Establish transparent communication channels for contractors
- Engage contractors throughout the process, adopting a case-by-case approach if possible
- Emphasise your understanding and awareness of the impacts to contractors and demonstrate this support with clear guidance and timely updates
Of course, collecting all contractors and exploring each of their status factors on a case-by-case status is not to be underestimated, which is why Hobson Prior has developed a Status Determination Tool. This tool allows organisations to determine status and utilise IR35 experts to ensure all factors are considered when determining whether a contractor falls in or out of scope of IR35.
Backed by a specialist, award-winning team, the tool provides more than an algorithm and allows our clients to provide contractors with timely and accurate determinations, which in turn promotes better communication and more support in their preparations for April 2021
See how Hobson Prior’s IR35 status determination tool can help life sciences companies best prepare for changes to IR35 by contact our team at IR35@hobsonprior.com
