In this short article, I’m going to explain why you may not be aware that IR35 is currently costing your Company £millions, and how you save these additional costs, back to your bottom line.
I have over 17 years as a specialist IR35 Lawyer, I will also explain why companies misunderstand IR35 and their perceived risks, in reality if you use expert guidance there are no liabilities or risks, only significant benefits. It’s a real opportunity to create a competitive advantage for your company.
Since the 2021 reform, IR35 has become a very expensive headache for companies to solve. Day rates have increased, it’s a struggle to find the right calibre contractors, and even more of a struggle to keep them. There is a 25%+ cost uplift when hiring contractors ‘inside IR35’, in our observations many companies have convinced themselves the contractor is simply ‘picking up the tab’ for these additional employer taxes when working inside IR35, within their day rate.
In truth, it’s always the end Client that is picking up the tab when a contractor is inside IR35, and it’s a very expensive one.
It’s simple maths, let me explain.
There is only one important question you ever need to ask when you employ a Contractor on inside IR35 terms.
Is the Contractor content with their take home pay?
To be honest, whatever their answer is, you have a problem to solve .
If the answer is no, you likely won’t be able to keep them to finish the assignment, if you were lucky enough to attract them in the first place. Industry stats show they’ll be off as soon as their head is turned, most often for an offer outside IR35.
If the answer is yes, you are simply paying 25%+ more cost than you need to hire them.
Let’s look at the illustration below of engaging a typical £500 per day skilled Contractor outside IR35, making the comparison of the cost to hire inside vs outside IR35. Their circumstances are identical, the same holidays (30 days). We’ve also allowed for all the costs associated with their Ltd company, relevant if they are outside IR35.
Client Cost | Client Total budget per month@ £628/day (with 30 days leave) | Client Total budget per month @ £500 day (with 30 days annual leave) | ||
| Less: Employer NI | No employer deductions required | |||
| Apprenticeship levy | ||||
| Total Candidate Gross Monthly pay | Total candidate Gross Monthly pay | |||
Contractor Cost | Less: PAYE & Employees NI | Corporation tax, Dividend tax, PAYE & NI | ||
| Candidate net pay | Candidate net pay | |||
As you’ll see, if the Client was to pay the Contractor outside IR35, they’d save themselves £2,452 per month, or £29,424 per year. That’s a cost uplift of over 26% to pay the same Contractor on an inside IR35 basis.
The Contractor’s net income is the same, they’re no better or worse off in either scenario. If they’re content with the take home on offer, they’re content however it’s paid to them, inside or outside. It’s always the Client footing the extra.
In this short article, I’m going to explain why you may not be aware that IR35 is currently costing your Company £millions, and how you can save these additional costs, back to your bottom line.
I have over 17 years as a specialist IR35 Lawyer, I will also explain why companies misunderstand IR35 and their perceived risks, in reality if you use expert guidance there are no liabilities or risks, only significant benefits. It’s a real opportunity to create a competitive advantage for your company.
Since the 2021 reform, IR35 has become a very expensive headache for companies to solve. Day rates have increased, it’s a struggle to find the right calibre contractors, and even more of a struggle to keep them. There is a 25%+ cost uplift when hiring contractors ‘inside IR35’, in our observations many companies have convinced themselves the contractor is simply ‘picking up the tab’ for these additional employer taxes when working inside IR35, within their day rate.
In truth, it’s always the end Client that is picking up the tab when a contractor is inside IR35, and it’s a very expensive one.
It’s simple maths, let me explain.
There is only one important question you ever need to ask when you employ a Contractor on inside IR35 terms.
Will you pass an HMRC IR35 enquiry?
Take our 5 minute online IR35 risk assessment to find out
HMRC’s soft landing period has ended and IR35 enquiries will soon begin in the private sector. Make sure you identify any risk areas and ensure you’re managing it correctly.
IR35 Myth: There is a Company Risk When Working ‘Outside’ IR35 with Contractors
When you look at the numbers, the only logical and commercial conclusion would be to work outside IR35 with your contractors, the savings are eye watering. The barrier to this is the misunderstanding that this comes with risks.
In my 15 years specialising in IR35, I’ve worked with over 2000 clients, 6000 contract reviews and managed 100+ HMRC IR35 client inquiries (100% success rate). I can say categorically there are no risks if you manage IR35 correctly, only benefits.
It’s all comes down to the level of expertise . This is where companies leave themselves exposed, they try to self-manage IR35, most often with a team of people that have no specialist IR35 legal background to call upon. IR35 is very complex, you can’t learn it on google, nor should you be receiving guidance from Recruiters with no more experience than your team has.
Here’s 3 facts you should find fascinating (and reassuring):
- If you use IR35 legal specialists to manage IR35, you satisfy HMRC’s requirement for ‘reasonable care’. This immediately removes your liability, that now passes to the Recruiter you are using. (I suspect your recruiters don’t tell you that)
- Structure your contract supply chain intelligently and you can make it a requirement of the Contractor to indemnify the supply chain (Client & Recruiter) for any perceived tax risk loss. This is one area of specialism for us.
- Manage IR35 robustly, with specialist guidance, and HMRC will be content. 99% of the HMRC IR35 inquiries I’ve managed have lasted no more than an exchange of opening letters, once HMRC realise you’re managing it correctly with legal knowledge, they recognise there is no exposure and move on to more vulnerable companies.
Conclusion
Remember it’s always the Client that is picking up the tab if the role is inside IR35, never the Contractor. It’s also a very solvable problem.
I’ll leave you with one key statistic. The IR35 reforms were introduced firstly to the Public Sector in 2017, with a ‘three line whip’ to push everyone inside IR35. Here we are in 2022, over 50% of the new Contractors working in the Public Sector are outside IR35.
By comparison, only 15% of roles are advertised outside IR35 currently in the Private Sector. It has to play catch up, and fast.
In our experience, 75% of your skilled contractors could fall compliantly outside IR35, with expert guidance. It’s about structuring their engagement as output based, as a Supplier to your company.
IR35 can be a competitive advantage for your company, we can help you achieve this.
