I was writing about what the IR35 changes meant for public sector way back in early 2017. Other than the fact that we’re talking about private sector now, nothing’s really changed — at least in terms of the legislation; plenty has changed in terms of the market and available solutions, but I’ll come to that later.
Today, working as a senior business analyst for SAP Fieldglass and as an expert in this field, I’m answering the same questions to private sector companies as I was to public sector almost three years ago.
The change in legal responsibility for determining IR35 status of contractors seems to be seen as a major threat to big businesses in the UK. So much so that an ever-increasing number of businesses have announced, or have been exposed as having, “all in” policies.
Back in 2017, I tried to explain to my mother what was going on and why tax legislation was relevant to me, someone who has worked in contingent staff management for over a decade. That was when I came up with “The Fence Story.” Fast forward and I’m still having the same conversations, but now with private sector customers. Maybe the headline of this article should be “There is a compliant and safe way to procure contractors for services that does not bring them in scope of IR35.” It just didn’t sound as catchy.
So, how does building a fence save you from IR35 chaos? I’ll start by explaining: It’s an imaginary fence, but that doesn’t make this method any less valid. The Fence Story was how I explained to senior executives, procurement teams, and contractors alike what the IR35 changes were all about when the concept was new to most. The idea is simple. Think about how you would contract for someone to build a fence in your garden, compare it to how you contract for services in your business, and quickly work out if it’s likely your contractors are “in or out” of IR35.
If you need someone to build a fence in your garden, here’s what happens:
- You start by Googling “fence building near me,” get some quotes, and choose your favorite based on whatever is most important to you: cost, presentation, someone you know who’s done the same or a similar good job for you before. There is nothing wrong or illegal in that.
- You don’t care if they’re big or a one-man band; that’s none of your concern, as long as someone who knows how to build fences turns up.
- When the fence builder arrives, they bring their own tools, although you may need to provide them with a key if they’re going to let themselves in. You can’t expect them to have their own key in advance.
- You show them where you want the fence and might tell them a bit more about it, like how high you want it or what color.
- You agree to the price up front, as well as how long it should take to get the job done. If they finish early or late, you pay the same.
- If the builder you spoke to isn’t the builder who arrives, it’s not a problem; once again, you just need someone who knows how to build fences.
- If they arrive at lunchtime and leave by late afternoon, you might roll your eyes but you don’t pay them for half a fence — you wait until the job is done.
- Once it’s built, they come in and let you know. You take a look and say, “good fence,” then pay up. If it’s a terrible fence that is the wrong height and color, you pay nothing and expect them to re-do the work before you pay.
This might sound a bit obvious but bear with me.
What is actually happening in businesses across the UK is people are hiring contractors but once they’re on site, accidentally doing all sorts of weird things. Such as:
- Calling a fence building company, but then providing the hammers, wood, and nails when the person shows up at their house.
- Calling up a friend even though they’ve never built a fence or even put up a shelf in their life.
- Providing direction on how a fence should be built — “Hold that wood there, then hammer it just like this…” — rather than simply explaining what it should look like when it’s built.
- Arranging a one-to-one for partway through the day to check their progress and set new goals.
- Expecting them to manage the gardener; or, if they finish early, asking them to babysit the kids with their spare time.
- If it’s not done at the end of the day, paying them anyway and then paying them again the next day to finish it off.
I came up with this story over two years ago, and it still feels as relevant today as it did then. Contractor or contracting company, whichever you are – are you contracting in the same way that you would if you needed someone to build you a fence? If you start out by asking that question, you’re on the right path.
Although the legislation hasn’t changed, the market and solutions have. The “all in” approach to IR35 is not the safe route that many businesses think it to be. I understand facing difficulties such as feeling like you do not have the time, money, or expertise within your business to review all your contracts and be sure that if you determine them to be outside IR35, that you’re right. But there is a way.
The SAP Fieldglass application has both contingent and services modules available, and even within the contingent modules you can configure a solution that offers a route to compliant services procurement, outside IR35. There are and will be businesses who realize this and use the tools available to them to continue to procure services safely and legally. If major companies continue to apply an “all in” methodology to services procurement, then the ones that do not will have their pick of the market. The risk to a business of losing top talent to those willing and able to look past the initial fear of financial penalties for making a wrong judgement is greater than many understand.
So that’s why I’m here, writing again about my fence story. Deducting tax and NI from a true contractor’s pay isn’t fair or what the IR35 legislation change is designed for. HMRC are looking to end hidden employment and related lost revenue. Everyone can do their bit to help achieve that aim without costing their business or themselves.
If you are treating contractors like employees, now is the time to change the behaviors or convert them to contingent workforce members. But if you are hiring people to build fences and then really letting them do that job, then you can find a solution that allows you to do that.
If you have questions, I invite you to register for an upcoming webinar I will be co-hosting to look at the true cost of “all-in” approaches as well as the alternative SAP Fieldglass can offer .
To learn more about IR35, please join the upcoming webinar January 22: Alternative Approaches to IR35 Management.
Lucie Hodges is a senior business analyst for SAP Fieldglass.