IR35: time to make the move to permanent employment?
With IR35 looming for the private sector many IT contractors are considering a potential move to permanent employment to avoid losing up to a quarter of their income in increased taxes. Richard Mort is a director at Edge Testing Solutions and an ex-contractor himself. Here he explores the issues of IR35 for contractors and discusses the pros and cons of leaving contracting behind for a permanent role.
As you can see from my photo I’m no spring chicken. I’ve been in IT for the best part of 40 years working my way up from developer to project manager and then moving into the world of software testing. Although I have spent the majority of my years as a ‘permy’ I did undertake a six-year stint as a contractor.
I really enjoyed contracting as it suited my lifestyle and level of technical expertise at the time. Although having gone from being a project mto a contract senior test analyst was a bit of shock, as suddenly I wasn’t in charge. But once I got over that contracting made good sense. I liked the fact that I could go home at night without the full responsibility of a project continuously gnawing at the back of my mind. The ability to work with a wide variety of clients was attractive; typically doing the same job but at different locations and with different challenges. And of course, there were (at the time) many ways an accountant could increase the amount of money in a contractor’s pocket at the end of the year.
However, there were also downsides to contracting. The endless search for new contracts, agencies’ promises turning to dust, the total lack of training and ability to progress one’s technical and professional capability and skills. It was also the case that sometimes I brought more knowledge and experience to the table than the project manager, but was unable to influence key decisions which proved frustrating.
To be honest, I was lucky, I got three one year extensions with the same financial company and so became part of the furniture. No more interviews, no more agency promises, good solid annual contracts……. This was, in the end, the reason for my contracting downfall as the company in question removed the risk of me leaving by offering a great package, an excellent career path and the certainty of a predefined training plan. Sold! And I’ve never looked at going back to contracting since.
My contracting career occurred way before IR35 had been conceived. Skip forward to 2020 and I’m not sure if a similar contract would be available as it was many years ago. IR35 was originally introduced to tackle the problem of ‘deemed employment’. This is where organisations engage workers on a self-employed basis and usually through an intermediary, rather than on an employment contract, so they become deemed, or "disguised", employees. If a contractor is found to be working within IR35, it can reduce net income by up to 25%, costing the typical limited company contractor thousands of pounds in additional income tax and National Insurance contributions.
The net is widening
Up to now, IR35 has only been widely applied to public sector bodies but the changes next year will see the net widening to cover the private sector. Many contractors moved away from public sector work to escape the risk of IR35, but this will no longer be possible. There is a huge amount of noise and confusion about IR35 and how it will impact contractors going forward. The following, however, is fact:
- Firms cannot avoid IR35 unless they employ contractors on fixed-rate contracts and therefore pay all employment based taxes (which is the same as applying IR35 itself)
- When considering a case the HMRC will attempt to disregard the actual contract in force between the contractor and the client and review the actual nature of the contractor/client working relationship to create what is known as a ‘notional contract’. This will be used by the HMRC to decide if the contract is a business-to-business service (IR35 does not apply) or is considered employment driven (IR35 does apply)
- HMRC reviews can be undertaken retrospectively which can be time-consuming and potentially expensive and stressful for the contractor.
So IR35 is a headache for the contractor….but from next year it will also be a headache for the private sector client. The effort associated with collecting and submitting tax and NICs to HMRC is being pushed back up the supply chain to intermediary organisations and ultimately to the engaging organisation or end client.
IR35 driving fear, uncertainty and doubt
At Edge we have already seen client companies view IR35 as a key risk for their business both from a financial and resourcing perspective. A nervousness is noticeable when reviewing IR35 requirements for next year. This may potentially result in organisations viewing the necessary level of administration, time and money as an overhead they are not prepared to bear. The net result is the reduction or removal of contractors who might be “caught” by IR35. Clients are also concerned that contractors or umbrella companies may increase their rates to compensate for loss of revenue.
Enough doom-mongering. Will IR35 be the demise of our vibrant contractor market in the UK? I don’t believe so. There will always be a need for capable highly skilled IT professionals who can fill that tactical gap which can’t for whatever reason be filled internally. However, the market could potentially shrink and not everyone will be able to find the kinds of contracts that are available today - for some contractors this may be an ideal time to take that leap of faith and secure their future by entering permanent employment.
At Edge Testing, for example, several associates have already decided to go permanent. There are many attractive reasons to consider this in the current employment climate:
- End clients no longer categorise you as an IR35 risk. We provide clients with a full managed service which is considered to be outside of IR35 rulings
- Access to a full training program that is aligned to strengthening current skillsets or introducing new skillsets
- Structured career path. Instead of being stuck at the same level for several years employees have plenty of options. They can work in more technically related roles such a performance testing, different industry sectors (Edge Testing is active in all main industry sectors) or perhaps a move into a management role
- Job security as a permanent member of staff. This was an important decision point for me as after six years I was becoming less enamoured with the contract agencies and also the risk of not being in work. I didn’t realise it at the time but it was a big relief to get this monkey off my back.
- Varied engagements. Unlike many companies, we can offer a wide variety of work in many ways similar to what a contractor would experience over multiple contracts
Looking back I feel like I was almost forced into taking permanent employment, however, it was the push I needed and my career flourished as a result. Although IR35 is directly aimed at contract-based workers I believe that it will be the risk-averse end clients that will push some contractors into the permanent job market. Doing this willingly by selecting a great employer will be a lot easier than grudgingly taking the king’s shilling!
Edge Testing could be the launchpad for your new permanent career. We would love to hear from you and would be happy just to have a chat to see if this could work for you.
To contact Rich directly please e-mail him at firstname.lastname@example.org for a no obligation chat.
To contact our careers team please e-mail email@example.com
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