Luxoft : IR35 - End Of The Road For Contractors?

Large numbers of IT contractors working in the UK banking sector operate outside of IR35 regulations. But with new legislation due in April 2020, this arrangement looks set to change with consequences for both banks and contractors.

Most banking contractors are brought in as an alternative to salaried employees and are treated as such. A job description is written, a recruitment ad placed, CVs received, candidates interviewed, background screening initiated, and the successful candidate onboarded. On arrival, the newbie receives his or her office pass and claims a desk with a bank-owned-and-certified workstation. They're assigned an internal email address, added to the employee directory, and instructed to pass the mandatory online training, affirmations, and assessments.

To continue engaging contractors outside IR35, all this needs to change.

Engaging companies, not people

Instead of hiring contractors via job ads, you'll advertise contracts for tender. You'll screen on the basis of company profiles instead of CVs. You won't need to onboard individuals, because you'll be engaging third-party organizations to work for you. And with HR and recruitment no longer involved, responsibilities will shift to the procurement and legal functions.

Worker flexibility

Workers from those third parties need to be free to substitute each other at will and to use their own office equipment, working the hours they choose, from wherever they want.

Much has been written
about how to engage contractors and remain outside IR35. However, while this is possible in theory, it seems unlikely that large banks would be willing to make sweeping changes to their processes and rethink their entire way of working with contractors.

Statement of Work - a silver bullet?

Many have assumed that IR35 can be avoided by employing contractors through an agency on a Statement of Work (SoW) basis. Where there are genuine deliverables, milestones, and outcomes, this could be a practical solution (subject to the above constraints). However, it passes IR35 status determination on down the contracting chain, as described in the illustrations from HMRC.

Furthermore, this could introduce new risks for the bank. HMRC could decide that an SoW is not a genuine service contract and that the bank is actually the end user. The bank would then be liable for tax and National Insurance contributions; a situation it would not have expected. Risk-conscious banks will want to pay close attention to the resources underpinning any service contracts.

Inside is the way to go

As a result, banks are likely to engage most of their contractors inside IR35 from next April. This will increase costs by at least 14 percent on top of current rates. Presumably, contractors will end-up footing the bill as banks look to keep costs flat by cutting daily rates.

So, can it really be worth continuing as a contractor without the benefits and protection of full-time employment?

#bankingindustry

#IR35

#workforcestrategy

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Mark Reynolds

Mark is a Senior Engagement Manager within Luxoft's Financial Services consulting and advisory division. With 12 years of experience in Financial Services technology, he is an expert in working with nearshore delivery organisations, having built and led large managed service teams across central and eastern Europe on behalf of leading financial institutions. Mark draws upon this background to help clients simplify their IT estates and to make effective use of nearshore as part of their global workforce strategy.