New off-payroll working rules are dramatically shifting the way companies engage external service providers. Telefónica Tech is ready for the new world of IT services sourcing.
Major changes to IR35 tax rules are imminent, and they’re having a huge impact on the way private companies source external IT service providers.
First, a brief recap of what’s changing. Under existing off-payroll working rules, solo providers of IT services to private sector companies must decide and report their employment status to HMRC, and are personally responsible for paying the right amount of employment tax.
But from April 1st, the onus is shifting to private companies to determine the employment status of their externally contracted workers, and to check they’re paying the right amount of tax.
In other words, if a contractor is fulfilling a role similar to that of an employee, the company is responsible for checking that the contractor is paying PAYE and NI as an employee would. If they’re found not to be, the company becomes liable for the unpaid tax – as NHS Digital found in October 2019 when it was landed with a £4.3m bill.
The rule doesn’t apply to sole traders, but it does apply to contractors who offer their services through a limited company, which HMRC terms a Personal Service Company (PSC).
A huge shake-up in IT services sourcing
The shift in liability is causing a huge shake-up in the way private companies view external IT services providers. Contractors used to be a flexible source of much-needed IT skills without the cost and admin overheads of hiring permanent employees.
The new rules will reverse that situation overnight, turning a flexible contingent workforce into an admin-heavy business risk. Research by Computer Weekly suggests that many large companies are shedding PSC contractors before the 1st April deadline, and our own conversations with clients and others in the industry validate these findings.
Some organisations are even instituting blanket bans on PSC contractors unless they agree to work ‘inside IR35’ (paying the same rates of tax as a salaried employee, but without benefits like paid holiday and sick pay) or join an umbrella company that will take on the liability of ensuring contractors pay the right tax.
Contractors aren’t too happy about the situation, either. Faced with the choice of working ‘inside IR35’ or finding ‘outside IR35’ work elsewhere, huge numbers are choosing the latter. A survey by inniAccounts found that over 50% of contractors intended to leave their current contractor position before the end of March. Only 10% said they were prepared to take a permanent role if one was on offer.
Finding replacements creates a sourcing dilemma
The sudden exodus creates a huge dilemma for IT and Procurement teams. Unless replacements can be found swiftly, departing contractors will put critical projects at risk.
One contractor told Computer Weekly that “major IT projects are at risk within the financial services sector, and the whole financial system could collapse as people will not be there to support these systems anymore.”
Many companies are turning to IT consultancies to ensure project continuity – but there are implications here, too. Under the new rules, the onus falls on the client to check that any contractors hired by those consultancies are paying the right taxes.
Within the client company, that due diligence work is falling to Procurement – making the sourcing of external IT support a massive admin burden.
Telefónica Tech is ready for the new world of IR35-compliant sourcing
At Telefónica Tech, we’re receiving more and more enquiries from large companies keen to understand how we can help to augment their data and analytics project teams. Everyone is concerned about the risk of unknowingly hiring one or more PSC contractors who might be using a consultancy like Telefónica Tech as an intermediary.
As a result, we’re being asked by procurement departments to document, in detail, the steps we’ve taken to mitigate those risks for our prospective clients.
Fortunately, Telefónica Tech is already prepared for the new IR35 rules, and we’re able to assure prospective clients of the following:
- All our project teams are comprised of permanent employees of Telefónica Tech, with our payroll system deducting their PAYE and NI contributions
- We treat each client engagement as a discrete project, with a statement of work and defined project deliverables
- Rather than providing IT generalists who could be considered ‘substitutable’ under IR35 rules, we assign domain specialists for each stage of the project: from business analysts and data architects to software developers, engineers and data scientists
Additionally, when customers use our services, they don’t just get the consultants assigned to the engagement, they get the team behind them, our accelerators and frameworks, senior technical QA and escalation support.
Talk to us about your data and analytics projects
If you’ve been affected by the imminent change in IR35 rules, Telefónica Tech may be able to help. We’re very happy to discuss the steps we’ve taken to mitigate IR35 risk for our clients, and the ways we can help to ensure continuity on critical data and analytics projects.
If you’d like to discuss a current or planned project, please do get in touch.