In my 27 years in procurement, I’ve rarely encountered a savings opportunity as lucrative as that offered by IR35 – the UK tax rules on off-payroll working. Implemented correctly, you’ll deliver seven- or even eight-figure annual savings, directly impacting the bottom line, not cost avoidance.
The reality is that far too many procurement teams are missing the trick, believing that IR35 is too complex and that they face too many internal hurdles.
Misunderstood? Yes. Complex? Far from it.
I’ve specialised in IR35 for the past few years, learning the depths of the legislation. During this time I’ve educated lots of CPOs and their teams, with the same misunderstandings occurring time and again. Let me dispel them.
If your company does not have the majority of its skilled contractors engaged outside IR35, you are most likely not applying the legislation correctly. HMRC’s own expectation is 66% would fall outside, and just 33% inside IR35. In my experience, 75% outside IR35 is achievable.
Understanding the cost of not getting IR35 right
The typical additional cost of engaging a contractor inside IR35 instead of outside is around 25% due to a combination of employer’s taxes and day rate uplift. On average, this equates to £25,000 per contractor, per year. A typical corporate has 200 contractors, if they are all currently inside IR35 that amounts to £5m.
To flip that, if you pushed 75% of those contractors outside, you’re looking at cost savings totalling £3.75m, so it is worth investing the time to understand how – even more so given savings are incredibly hard to come by in this inflationary environment.
The savings don’t stop there, much more to come.
IR35 is also impacting your professional services spend, possibly without your team even realising it. A continued struggle to hire contractors inside IR35 has led to the unhealthy habit of ‘body shopping’ resources via consultancies, at eye-watering day rates.
I’ve observed one extreme example of a corporate having spent £100m+ sourcing skilled labour from consultancies, all directly as a result of the company taking a misguided blanket ban policy on self-employed contractors.
Companies’ difficulties in this area have been exacerbated by a dearth of subject-matter experts. Until April 2021 it was a contractor’s responsibility to determine their status, and they don’t like paying for legal advice. The result of this was a lack of legal knowledge in the industry, there wasn’t a commercial market willing to pay for it so the law firms weren’t equipped. You can have 20 years of employment law experience and know all about grievance procedures and unfair dismissal, but it won’t help you navigate 23 years of IR35 case law. This lack of knowledge, coupled with the perceived risk, led to companies simply restricting the use of self-employed contractors, and it’s now hurting them, operationally and financially.
Time and materials on a day rate or hourly rate is fine, fixed price and milestones are not necessary. Never rely on CEST or automated IR35 tools, the critical ingredient is always the lower-tier contract, HMRC’s point of focus. It needs to be structured as the procurement of a service, not the supply of labour. It’s surprisingly achievable in most contractor engagements, with some education and guidance.
There is also light at the end of the tunnel, the market is adapting. There are some great new vendor management systems that will manage IR35 end-to-end compliance, and the UK’s HMRC will be announcing some radical changes to IR35 that will reduce the headaches for hiring companies. I’ve been a direct part of the HMRC consultation and it’s going to be a game-changer.
It’s time for procurement to step up and challenge the IR35 policy decisions your company took in 2021. Don’t sit on your hands, take the time to educate yourself and reopen the conversation, I’m happy to help. There are savings running into the multimillions for those that do.
Mark Coulson MCIPS is an IR35 procurement consultant at IR35 Pro. Book a free session with Mark