Many businesses are finding it difficult to fill contractor positions. But this isn’t really because of a shortage of contractors.
Contractors and hirers are actually at an impasse. IR35 rules have caused contractors to push up rates to accommodate reduced tax efficiency, and hirers to essentially reduce them since hiring contractors inside IR35 now comes with additional costs.
And unless companies embrace IR35 and learn to work with it, this problem is only going to get worse.
Our own Gary Fay and Peter Sanders believe that with the right knowledge, businesses can safely and easily hire contractors to work both inside and outside IR35.
The contracting impasse
“Hiring contractors is harder and more expensive than it used to be,” Pete explains. “And it’s probably going to get worse.”
“If contractors are inside IR35, they’re pushing their rate up to accommodate the increase in tax. On the other side, employers hiring contractors inside IR35 have to pay those employment costs – like they would a normal employee. PAYE tax, National Insurance, possibly pension contributions, holiday pay – all the costs you didn’t have to incur before.”
If a business foots the bill for the extra, a £500 day rate incurs an additional £150 cost. However if the contractor is expected to take a lower rate to allow the business to pay tax, NIC and other costs on their behalf, their day rate of £500 will be reduced to £350.
“The inside IR35 model adds a £350 swing”
“This means that the inside IR35 model adds a £350 swing and neither the client or the contractor is willing to pick up the tab,” Pete says. “And this is before contractors push up their rate by 20-30% to offset tax losses. Hence the impasse.”
And if neither side gives in, the situation will continue to stagnate.
“Both client and contractor need to find a medium ground,” Gary says. “Unless contractors are willing to reduce their day rate expectations and the client is willing to add a little more to the pot, nothing is actually going to get resolved.”
- Our guide to hiring contractors includes everything you need to know about navigating IR35. Download it here.
Costs of only hiring within IR35
This increase in cost isn’t the only reason businesses are hesitant to hire contractors. Many hirers are worried about falling foul of HMRC’s new rules.
To avoid the perceived hassle of proving their contracted roles fall outside IR35 rules, many companies are using a blanket approach and keeping contractors inside IR35. This means that they might be paying additional costs unnecessarily and slowing down the market – many contractors feel underpaid and undervalued when offered these positions.
Gary and Pete argue that with the right knowledge, companies can easily offer contracted roles outside IR35. This would mean simply paying the contractor’s day rate with no additional costs.
“One thing that has to change is the way organisations manage contractors,” Pete explains. “If they start moving to deliverable based work, I think what we’ll see is companies getting more value out of their contractors – and a lot of them will be pushed outside IR35.”
Moving to a deliverables based model is a big change for most hirers. It involves putting a lot of trust in the contractor and changing the way they’re managed. Contractors working inside IR35 would be managed like an employee, with regular or daily contact and updates. Contractors working outside IR35 should be given more autonomy and asked to work to clear milestones.
While this is a large change, Gary and Pete believe it can be done.
Companies need to embrace IR35 legislation and learn how to apply it. Those who use the new legislation who reset how their company uses temporary staff will succeed.”
“They can use the legislation to drive more ROI from expensive contractors by making them more delivery focussed.”
“At the same time, they can treat those who fall inside IR35 as they would any member of staff – bring them into the business and develop them.”
It’s not surprising that businesses are put off by this huge change, though – put off by the apparent complexity of the problem.
“Nobody is working out where they want to be,” Gary says. “They’re almost waiting for things to change. And I don’t think it’s ever going to change. The emphasis is on the clients to educate themselves on how to work with IR35 regulations.”
- Find out how our three IR35 products can help hiring companies who are overwhelmed by contractor shortages.
Hirers need to learn to work with IR35
For many companies, the reason for their inertia comes down to a few factors – fear of getting it wrong, hassle, and financial cost. But they could actually save money and administrative burden by educating themselves and learning to work with IR35.
“Interestingly, the cost of compliance, and doing it right, is far less than having a blanket inside IR35 approach,” Pete explains. “You could hire a contractor outside IR35, fully compliant, with less risk, and actually reduce the cost of your project.”
“As we’ve said, that £500 a day contract has now become £650. If you multiply £150 by 240 days a year, that’s quite a lot of money (£36k per contractor). The cost of changing the contracted work to a deliverables based approach and managing a contractor outside IR35 is much less.”
“Learning to work with IR35 requires time and effort”
It’s understandable why businesses are currently struggling. Learning to work with IR35 requires time and effort. But doing so is the only solution to the problem hirers and contractors currently face.
“If you are a hiring manager and the lack of candidates is stifling your projects, go and talk to the appropriate person in the company – or learn about it yourself – and actually work for a solution,” Gary says. “Because there certainly is one.”
“It takes some up front work, but once you’ve done it once you can replicate it for each contractor.”
There is no shortage of skilled contractors. Instead, there’s a problem which has a clear solution. Provided you face IR35 head on, you actually have the power to find the right contractors for your projects, fire up the market, and ultimately create more efficient, long-term hiring and working models.
IR35 doesn’t have to be difficult. Contract Complete can help you with every stage – from determining IR35 status to finding and managing contractors and all the way through to project completion. Contact us to find out more.
