Preparing for IR35: what we can learn from the public sector

With skills shortages in almost every sector, private sector businesses should look to IR35’s impact in the public sector to ensure they don’t get disoriented and wind up losing their best contract workers

The confirmation of IR35 reform in private sector organisations, set to be rolled out in April 2020, has got many HR, procurement and talent acquisition leaders debating how they are going to approach IR35 rules. With so few businesses revealing their plans, it appears that everyone is waiting to make the first move. This is inevitable: in dynamic markets, no-one wants to plant their flag only to then be undercut by key competitors.

However, while there is much frantic questioning within organisations, there are valuable learnings that we can take from the introduction of IR35 rules in the public sector back in April 2017. Personally, I have worked on IR35 legislation across a number of public sector bodies, and while private sector organisations are often structurally different, there are still things we can learn.

One advantage that the private sector has over the public sector is that the Check Employment Status for Tax (CEST) tool has been available for a couple of years now. Of course, there has been some criticism surrounding the tool, but compared to the situation we had back in 2017 with the public sector (whereby the tool was only active a few days before the IR35 reform was introduced), it does generate some clarity.

Regardless of whether you believe the CEST tool to be fit for purpose, it does allow businesses to plan ahead.

Use the CEST tool to check the IR35 status of your current contractor workforce

One of the first steps that businesses should take is to put their existing contingent workforce through the CEST tool. This will give businesses the opportunity to map out the challenges that will arise next year. But rather than doing so for every individual contracted worker, contractors should be tested in the CEST tool on a role-by-role basis.

Why? Because there are inherent risks that could lead to precarious business outcomes.

As an example, one manager in a marketing department may put through their IT contractor and come to the conclusion that they aren’t within IR35. Meanwhile, in a different department, a different manager may put a similar IT contractor doing the same day-to-day role through the CEST tool and arrive at the opposite conclusion.

Not only does this cause organisational confusion, but it could also lead to equality lawsuits. By putting the role of IT contractor (in this example) through CEST, managers can ensure consistency throughout an organisation. Contractors know where they stand, hiring managers aren’t left to their own devices, and businesses are able to accurately assess their contingent workforce.

Build a library to optimise workforce planning

Putting contingent workers through the CEST tool on a role-by-role basis also gives businesses the opportunity to create a centralised library of which roles sit inside IR35 and which roles don’t. From a workforce planning point of view, this approach makes a lot of sense. If, for example, a business needs to hire new contractors, having a library in place enables them to immediately know where IR35 applies and where it doesn’t.

How the recruitment process will change

As one of the biggest work-related tax reforms this decade, IR35 is inevitably going to have a significant impact on the working practices in the staffing sphere. From next year, all contract roles will need to put through the CEST tool before going to market. While this may seem like a burden, the impact could be positive.

First off, a contractor applying for a role with your business will know whether the role is within IR35 or not, and can decide if it would work for them financially (wit the full knowledge that they potentially would have to pay additional National Insurance and PAYE tax). Being upfront and honest in this way creates trust, and you won’t get the rejections that will be inevitable for businesses who choose not to disclose the IR35 status of their advertised roles.

Moreover, by putting all contract roles through the CEST tool before promoting roles, a potentially messy process becomes seamless – speeding up processes and reducing time-to-hire. All of these factors lead to a better candidate experience, which is one of the most important factors in an employer brand. With a better employer brand, the more likely you are to attract highly desirable talent.

The key IR35 debates: what should businesses do?

There are many challenges that businesses will have to face in light of IR35. For starters, businesses will have to decide whether they will accept the additional costs of National Insurance and PAYE Tax, or pass the additional costs onto contractors through reduced rates. The first challenge will, as you’d expect, increase the cost of hiring in contracted talent, while reduced pay rates are less likely to attract the same quality of candidate that businesses are used to.

To put this situation in the context of the public sector, the majority of local authorities chose to pass IR35-related costs onto contractors due to increasing budgetary constraints. While this did prevent a rise in staffing costs, it also led to the most talented contractors moving to the private sector.

Though this may stop with IR35 rollout in the private sector, the pros and cons still need to be analysed. With small businesses exempt from IR35, we could see the best contractors moving in that direction. Likewise, if a business chooses to take the financial hit and accept NI and PAYE costs, they stand a better chance of attracting and retaining contractors. Businesses will need to ask the question: which is more important – talent or money?

Even for those businesses who can afford to take the financial hit, the issue found within private sector businesses right now is that few know how their competitors will approach this conundrum. With the situation unlikely to change, there is another approach. If the ‘who jumps first’ effect is to be overcome, businesses may have to start working together.

Industry focus groups

During public sector rollout, local authorities knew that the market for contractor talent would become more difficult. Here is what the situation could have looked like: local authorities competing with each other across county lines. Thankfully, this was rarely the case, with several local authorities deciding to work together in focus groups to ensure alignment.

This may seem like an impossible scenario for private sector organisations. Getting into bed with the competition is not something you’ll see in any business 101. It almost seems counterintuitive. But in the present situation preparing for IR35, it makes strategic sense for businesses operating in the same industry to work together in focus groups.

While the option of being able to undercut your competitors’ strategies disappears, the chances of it happening to your own business are significantly reduced. There’s also the opportunity to create a set template for everyone within the industry to follow. In this sense, the likelihood is that there will be reduced talent drain within your industry. If everyone is operating on the same playing field, there’ll be fewer outliers willing to stick their neck out and threaten the status quo.

For more information on IR35 reform in the private sector, download Guidant Global’s latest report by filling out the form below.