Employers: tax legislation poses risk to performance

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14 November 2019

Peter Schofield, chairman of Ford & Stanley Group, warns clients to make sure they’re ready for changes to off-payroll working rules

Pete - Keynote speaker

The 20th anniversary of our Group consultancy business first advising employers and contractors on IR35 passed this year. The rules, part of government efforts to combat what they see as potential tax avoidance, were introduced to ensure workers, who would have been employees if they provided services directly to a client, as well as the firms hiring them, pay approximately the same tax and National Insurance contributions as employees.

Back in 1999 Pride Park Stadium’s Toyota Suite was filled with people eager to learn how the forthcoming tax legislation was going to impact on them individually and as businesses. Ahead of changes to how these rules apply from April 6, 2020, below I have shared some points to consider to sense-check your solution whilst you still have time to act.

 

“We’re just going to get all of our contractors to go permanent”

Talking to rail businesses across the UK, one of the most common responses we’ve been hearing from client HR departments is that all contractors considered to be falling inside IR35 will become permanently employed. This is the simplest solution on the face of things, but their operational colleagues in the same businesses have expressed concern over how feasible this will be in practice and the potential impact it will have on business performance – a concern we certainly share.  If a company assumes that its contract workforce will simply sign permanent contracts of employment without having any sort of contingency in the event that their expectations are not met, then there is a chance that all work that currently relies on contractors may fail. The knock-on effect of that – late delivery penalties, product failures, drops in productivity, missed business opportunity – may well be catastrophic.  Bear in mind that, in any one day, more than one million contract or temporary workers are utilised by UK businesses.

The rise of the ‘just-in-time’ workforce

For most contractors, the response we have heard when asking what they plan to do is “why should I go permanent?” In many cases, the roots of this reluctance to be permanently employed dates back to the 1980s when our consultancy business first started noticing a change in worker attitudes during our annual worker behaviour surveys. In that period the parents of today’s millennial workforce were caught up in a shift from the perceived job for life to the new ‘we want you now but don’t expect to spend your career here’ mentality. 

Vast swathes of middle management were cut as people were, to coin a common phrase from that period, ‘thrown on the scrap heap’. Experiencing this either directly or watching parents struggle to adjust was seen by many as a betrayal by the employer and it hardened workers’ attitudes towards employment or, at the very least, created a situation where people accepted or proactively chose a project by project lifestyle as they took responsibility for their own future income.

From a financial point of view, deploying skilled labour through a service company has many advantages for both parties – the contractor earns more money in return for more risk in terms of continuation of work and the employer benefits from greater workforce flexibility and less liability.  

It has worked well and helped companies to be competitive so, considering all of the above, expecting lifelong contractors to switch to permanent employment status just because the employer now wants it that way to avoid some tricky legislation is unlikely to get much traction.

People with skills are consumers of employment opportunity

IR35

    Recent data from the Office of National Statistics suggests there are currently over 810,000 unfilled vacancies in the UK. Specifically in the rail sector, demand for both contract and permanent employees remains extremely high, meaning workers have a lot of choice. This is despite Brexit, questions marks over HS2, the Williams Review and a slow start to CP6.

    So, what are contractors likely to do with that choice when IR35 becomes law in April 2020? From talking to our UK-wide contractor workforce, this is what they’ve told us they’re planning to do:

    • Supply services through an umbrella company – 42 per cent;
    • No idea yet as they’re still waiting to hear what their current client wants to do – 38 per cent;
    • Be more mobile and supply services on a project by project basis – 12 per cent;
    • Become permanently employed by their current client or an alternative employer – eight per cent.

    This may of course all change over the next few months, therefore we continue to have dialogue so that we are best placed to advise.  Out of all the options, we consider the mobility across a wider client base to be the most interesting as, although it will require more planning and organisation, once established it may well represent that best opportunity for both the employer and the contractor to achieve the flexibility they desire and need, without falling foul of IR35 legislation.

    Advice

    The first thing we would advise employers to do is engage with their talent suppliers as a sounding board against plans, particularly if replacing contractors with permanent employees forms part of a new strategy.

    Speaking for Ford & Stanley, our recruitment business is regarded as the number one in the rail sector for hard-to-fill ‘white collar’ permanent roles, because we consistently deliver results. This is purely because we engage with employers and prospective employees in a very specific way, rather than advertising ‘jobs’ to people with a plethora of alternative employment choices. 

    In addition, from a flexible workforce perspective and again speaking for Ford & Stanley (although I am sure we are not alone) we have rail industry professionals working in partnership with our contracts and interim business, to enable clients to outsource packages of work to us, and teams of contractors that we mobilise across a number of companies on a project by project basis. The point being there are alternatives to taking the permanent or contract route that are worthy of discussions.

    Contractors should remember this is government legislation, rather than the choice of employers and agencies, therefore avoid the temptation to ‘shoot the messenger’. They too should engage with their client early and also their accountants, umbrella company and agency supplier.

    Featured in: RailStaff November 2019

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