For this interview, Chris Holcroft sits down with Xpertex Director, Marcus Trott, to get his explanation and thoughts about how changes to HM Revenue and Customs' IR35 is impacting the staff augmentation landscape for U.K. Information Technology projects.
What is the backdrop to this Marcus?
“IT projects in the public and commercial sector frequently depend on specialists contracted in to provide vital expertise normally outside that found amongst a client’s permanent staff. Xpertex has been involved in sourcing the right expertise to boost required skills in our client’s projects for over a decade. Ever since the start of this it has been common practice for contractors to set themselves up as Personal Service Company or PSC.”
What is a PSC?
“A PSC is a limited company with the consultant or contractor being the sole director and often the sole shareholder and controller of the company bank account. A PSC offers certain tax and expense advantages over PAYE but loses out in terms of employee benefits such as sick pay, holiday pay, maternity pay and others. The term PSC was coined by HMRC in 2000 when IR35 legislation was first introduced.”
IR35… what is it?
“In short, IR35 was introduced as what could be termed anti-tax avoidance legislation. It has evolved and grown since its inception to try to ensure workers are compliant with HMRC rules when operating as a PSC and not claiming tax benefits or allowances that they are not considered as entitled to. Consequently, HMRC has made efforts, in stages, to identify those PSCs that don’t, in its eyes, qualify for PSC status and should be brought ‘inside’ of IR35. This process can also involve PSCs targeted being pursued for taxes going back several years.”
What effects of IR35 have you seen?
“IR35 has not been without uncertainty, confusion and controversy, as any research spent on the subject will show. In 2017, all contractors operating as PSCs to public bodies, for example, had to satisfy the authorities that they were operating outside of IR35, or face the consequence of paying income tax and NI on their income. This is to create, what the Government sees, as a level playing field for taxation between permanent staff and contracted staff. This has been estimated to have affected up to 170,000 contractors to public bodies and has involved several thousand pounds per contractor in extra taxation levied.”
Hasn’t this had some publicity?
“Yes. notable public examples include BBC contractors who just recently in 2019 faced HMRC in a tribunal accused of being ‘careless’ in their tax affairs and falling inside IR35 despite having been set up as individual PSCs. Judges upheld the latter accusation but rejected the former. That said, those BBC contractors involved still faced paying 4 years of back tax, even though they insisted the PSC approach was taken owing to the BBC’s expressed hiring preferences.”
So IR35 has been disruptive?
“Without arguing the rights and wrongs of IR35, anyone engaged directly with contracting and staff augmentation for public sector projects and programmes will have experienced changes.
“Contractors in public sector projects brought inside IR35 will have seen their incomes cut without a reciprocal increase in the employee benefits an employee would receive, whilst public bodies have faced more costly and complex rules to manage their contractors. Some bodies have even introduced a controversial blanket approach to include all contractors as working within IR35. This has led to an exodus of contractors from some key public IT projects such as NHS, HS2, and TfL.”
What about the Private Sector?
“From April 2020 the extent of IR35 will expand to cover all but small commercial businesses, as well as shifting the responsibility of defining whether the contract is inside or outside of IR35 on to the end-client doing the hiring.
“However, those following developments closely have already reported a pre-2020 domino effect. Large corporates including GSK, Barclays and Lloyds Bank in seemingly assessing corporate risk around IR35 have pulled the plug on PSC contract renewals with the contractor being offered a place on the payroll or move on. This has seen those contracting to commercial organisations now facing the option of joining the payroll (with an impact on income); them moving on and trying to find a higher paid job to offset the ‘loss of income’ introduced with taking permanent employment; or to resign their contract as a limited company and accepting that they have to contract within IR35 to continue.”
And the result of all this?
“In all these cases, the Government better achieves its objective of increasing the Income Tax and National Insurance take, but as a result creates a state of flux for all concerned: for customers needing IT specialists; for ‘body shoppers’ sourcing the specialists; and for the contractors themselves, as the ‘system’ tries to shake-out the disruption caused.
“What is clear is that the supply of IT expertise is a market where supply is outstripped by demand and some projects will consequently suffer a shortage of skilled individuals to draw upon.
How has Xpertex approached this new landscape?
“Individuals placed by Xpertex now either take on permanent contracts with clients, or rolling commercial agreements written and performed as IR35 compliant from the outset. These contracts are based on tangible deliverables; therefore, they are about services and outputs and not hours clocked in. Take the example of a Project Manager. Typically, a PM may run three different client engagements per annum with regular, methodologically defined deliverables to each. These may be weekly, bi-weekly and monthly outputs as governed by the methodology employed on the project. Consequently, and importantly, any contract will pay the contractor based on services delivered to the client. This keeps the distinction between acting as an employee versus a service provider very clear.”
What has Xpertex been involved in all these years?
“Formed in 2006, Xpertex has helped clients in defence, financial services, education, retail, central and local government deal with secure IT project delivery and highly complex cyber and information security challenges. Today, its core business are Cyber & Information Security, Secure Product Fulfilment, and Secure Government.
“Being technology and vendor agnostic, Xpertex efficiently provides information security services for organisations large and small, that are robust, flexible and effective. A security focus always starts with an organisation’s human factors, in other words, its people, culture and processes. The technology 'fit' comes as a result of this understanding.
“Xpertex aims to build long term relationships with customers, acting as a trusted advisor.”
Where do you turn for guidance?
"We have a good set of advisors working for us, Milsted Langdon are our accountants and suitably qualified and experienced to provide financial advice. We also have a great working relationship with our clients in government. These contacts are invaluable in terms of helping to demysify some of the hype. I'd encourage people who want further clarification to engage with their own accountants, sooner rather than later."
Formed in 2006, Xpertex has helped clients in defence, financial services, education, retail, central and local government deal with secure IT project delivery and highly complex cyber and information security challenges. Today, its core business are Cyber & Information Security, Secure Product Fulfilment, and Secure Projects.
Technology and vendor agnostic, Xpertex efficiently provides information security services for organisations large and small, that are robust, flexible and effective. A security focus always starts with an organisation’s human factors, in other words, its people, culture and processes. The technology 'fit' comes as a result of this understanding.
Xpertex builds long term relationships with customers, acting as a trusted advisor.