IR35 – Challenge or Catalyst for Good Work?

Over 30 years ago, Charles Handy predicted a change in the workplace. He foresaw many more people working in portfolio careers and providing their labour not as employees but as a provider of services.

Even Handy might be surprised by how accurate this prediction proved to be. The emergence of gig workers, contractors and freelancers has been a key trend of the last decade.

Employers enjoyed the flexibility this brought to their workforce and many, though certainly not all, contingent workers enjoyed the benefits too.

But for HMRC, it has meant lower tax and NI. Pressured into securing more revenue, HMRC identified contingent working which is indistinguishable from employment as a tax loophole that needed to be closed.

IR35 was the solution.

IR35 first came into play in 2000 but only really got teeth in April 2017 when it became the responsibility of public sector employers to ensure all taxes and NI was paid where the work was deemed to be ‘within IR35’.

In April 2020, this responsibility extends to the private sector with very real implications.

The forthcoming changes to IR35 are just one of several burning platforms that are forcing employers to reconsider how they attract and engage with their workers.

 The implications are significant.

In the next 18-24 months organisations will need to revisit the composition of their workforce, their culture and the way they manage talent, achieve organisational effectiveness and approach workforce planning.

We have already seen Barclays and Santander making moves to bring all their contingent workers within IR35, with a fundamental impact on the shape, culture and flexibility of their workforce.

I would argue that such broad-brush stroke reactions are unnecessary and potentially damaging. While IR35 presents a challenge, there is also opportunity to re-set the culture and better engage the workforce.

In our research report, The Shape of the 2020 Workforce and the Impact of IR35, we make a case for a more positive response to IR35.

The research finds that where contingent workers are used legitimately to expand capacity and capability when required, there is little reason to abandon the model. Nevertheless, most contingent workers surveyed expressed concerns about how they might be affected, and many saw it as a potential catalyst for seeking employment.

This presents employers with a responsibility and an opportunity: the responsibility to communicate clearly with their contingent workers and the opportunity to secure key talent on an employed basis.

Matthew Taylor is the Chief Executive of the RSA, former Director of the Institute for Public Policy Research, and government advisor.

In September 2019, Matthew started a new part-time role as the Government’s Director of Labour Market Enforcement and is also a member of its Industrial Strategy Council.

Matthew joined Change Associates and Michael Page colleagues at a recent joint event, The Shape of the 2020 Workforce: the impact of IR35.

In 2017, Matthew was commissioned by the UK Prime Minister to conduct an independent review “to consider how employment practices need to change to keep pace with modern business models”.

Although the landscape has changed significantly in the subsequent two years, Matthew Taylor’s report is more pertinent than ever before. He sees a clear opportunity in IR35 to drive forward some of his ideas.

“One of the key recommendations in the report is that flexibility is a good thing, which is still a controversial view in some quarters. It has to be two-way flexibility benefiting the individual and the organisation.
“It’s important to distinguish between different kinds of contingent workers. The experience of the middle-class, educated professionals who are freelancers and that of the low skilled, low paid, insecure workers is very different. Legally they may appear to be the same, but their status, whether they get flexibility or whether the system works for them is radically different.”

 

Taylor’s report also highlighted the need for a level playing field when it comes to the regulatory tax framework. He believes IR35, with its shift of responsibility from the individual to the organisation and the stronger alignment between the tax system and employment status, will help address this.

But he is concerned that legal firms and accountancies are, even now, offering to help employers find ways to avoid bringing people onto the payroll and paying national insurance.

“Organisations should be successful because of their entrepreneurialism, their investment, their commitment. Not because of their ability to arbitrage a system full of loopholes.”

 

Matthew told us he is concerned by the lack of awareness and readiness in many of the organisations he visits. He describes a sense of denial in many companies and agencies and a lack of communication from a Government distracted by Brexit and elections.

This reflects our experience as consultants, where we find several large organisations have reacted – and perhaps overreacted – already, while many SMEs seem highly concerned but poorly prepared. Like Matthew Taylor, we believe the opportunities afforded by IR35 are great for those organisations that prepare for it now.

“The attitude with which we approach IR35 is critical. It’s an opportunity to create what I called Good Work in the report. I believe, as a public policy goal and social objective, we should care as much about the quality of work as we do about the quantity. New research shows people doing Good Work and organisations that create Good Work are more productive. And an important part of what makes for Good Work is pay and flexibility.”

 

Other factors that create Good Work include a sense of purpose, autonomy and motivation at work; an organisation which is fair and equal in the way it treats people; and feeling part of a capable team.

Reviewing your workforce structure and organisation design in preparation for IR35 presents opportunities to address all these points and create a high performing blend of contingent and employed workers. Matthew suggests a shift away from bureaucratic pyramidal structures to flatter, more autonomous designs that create autonomy, risk-taking and collaboration.

“As we think about IR35, I suggest leaders ask themselves how close they feel to being Creative Communities with a Cause and what do you need to do now to make it more like that?”

 

If you need help assessing your current exposure to IR35 and how you might prepare to seize the opportunities it presents, Change Associates and Page Group’s IR35 assessment service will help.

 

For details email info@changeassociates.com or call 0207 1011 979.

 

Last updated: 13 Feb 2020