In the recent Budget released, the Chancellor of the Exchequer confirmed that changes to IR35 regulations will be extended to the private sector. It was initially expected to be implemented from April 2019 but this has been postponed until April 2020, providing a welcome delay for many businesses, practices and interim Lawyers working via limited companies.
What is IR35?
If you are not familiar with IR35 it was introduced in 2000 to close tax loopholes for individuals who worked via their own limited companies and who were essentially ‘off payroll’. In April 2017 these rules (IR35) were tightened within the public sector, with employers left to determine whether national insurance contributions and income tax applied to the interim staff working for them.
In or Outside IR35?
The decision as to whether a role falls inside or outside IR35 is made by hiring managers, backed up by information from the worker. This is a very time consuming and complex process with the rules covering a whole host of different aspects such as: control/management of the worker, right of substitution, the equipment required, integration into an organisation, contract terms and previous IR35 status.
What impact did this have in the Public Sector?
The implementation of the new rules in the public sector caused a huge amount of upheaval and frustration due to the following reasons:
- The complexity of the rules for clients;
- The loss of skilled talent and exacerbation of skills shortages;
- The increase in usage of unregulated non-compliant models (42% of REC members observed an increase in non-compliant umbrella / intermediary models since the 2017 reforms in the public sector);
- Some contractors paying too much tax, as a result of ‘blanket in or out of IR35’ decisions.
What does the public sector ‘off payroll’ landscape look like now?
Essentially, there is still a very buoyant interim and locum market with a vast number of roles available. However, it has provided a huge administrative burden for public sector bodies, a decline in the candidate pool (in an already candidate short market) and an increase in daily and hourly rates.
Very few ‘off payroll’ workers actually fall outside of IR35, which is estimated at approximately 5% of all applicable workers within the legal sector. Although some candidates chose to work via a limited company, we have also witnessed an increase in the number of interim candidates opting to work via an umbrella company or PAYE (pay as you earn) via an agency. Despite this, there is now a general acceptance of the new rules from both a client and candidate perspective and the market continues to flourish.
The good news for the private sector
The Chancellor has confirmed that the new private sector rules will only apply to medium and large businesses; however, we are interested to see what size bandings will actually differentiate a small or medium firm as this may not apply to everyone.
In addition to this, the interim market continues to grow rapidly, fueled by the rise in flexible working and prioritisation of work / life balance. The very nature of temporary roles allows organisations to bring in expertise as and when it is required rather than committing to additional permanent headcount at a greater cost. There is still a shortage of skilled legal workers, and as a result the demand and rates remain high (often much higher than the comparable permanent salary), some umbrella company providers also claim that there are still some benefits to be gained from using their service.
We will see change within the private sector as a result of the implementation of the new rules in April 2020; however, as witnessed in the public sector, it is fortunately not all doom and gloom. Although there will be a significant impact on the level of tax that ‘off payroll’ workers in the private sector will pay, there are nevertheless many benefits that can be gained from working this way and these are not just financial.
Charlotte works on our dedicated interim team, recruiting consultants, agile/flexible workers and document review lawyers. If you would like to recruit an interim lawyer, or if you’re looking to work on an interim basis, please don’t hesitate to reach out.
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