After a year-long delay due to the Covid-19 pandemic, IR35 (or Off-Payroll) tax reforms were finally implemented in the private sector in April 2021. Introduced to combat tax avoidance, IR35 is designed to determine whether a non-payroll worker is a bona fide contractor or a ‘disguised employee’ of the company. Now, a year into the new legislation and we are only just seeing the tip of the iceberg when it comes to the effects on the workforce, particularly for skill short sectors that have historically relied on contract staff such as engineering.

IR35: The Background

To understand why inside IR35 roles will be hard to fill it is first important to understand what inside and outside of IR35 really means. To be ‘inside IR35’ means that the individual is considered, for tax purposes, an employee of a business and therefore subject to PAYE. When working inside IR35 the appropriate taxes need to be paid, which usually involves a ‘deemed payment’ of income tax being made at the end of the tax year. To be ‘outside IR35’ means that a person is operating as a genuine and legitimate independent professional or contractor for a firm. Those in roles that are genuinely deemed to be outside Off-Payroll legislation will be able to clearly demonstrate that they have full control over their own way of work, for example, setting their working conditions, being responsible for their own taxes or having an independent business they operate through as a self-employed individual.

Employee vs. Contractor

IR35 was also introduced to ensure contractors weren’t unfairly being treated as employees, without access to the benefits that permanent staff are afforded. With an employee, an employer must provide a workplace pension, paid holiday, sick pay and perhaps further benefits that come with being an on-payroll employee but most importantly, pay the employer’s National insurance contributions. However, a contractor is paid a flat and set fee and can easily be dismissed if there is no further work for them, providing a sense of uncertainty. Further implications of a contractor’s assignment being inside IR35 is that they should be taxed at a similar rate to a regular PAYE employee, however they are not able to receive the same tax benefits when working through a limited company.

For example, if the job/contract is deemed to be inside IR35, the organisation that pays the personal service company (PSP) will be responsible for the following:

• Making PAYE RTI submissions to HMRC
• Deducting PAYE tax
• Deducting National Insurance
• Paying employers' National Insurance contributions

Why Inside IR35 roles will be hard to fill

Off-Payroll legislation itself is complex to navigate, but the biggest challenge that it presents to engineering employers is that it will limit available talent pools. The risks of a wrong determination weigh very much on the business. Employers are responsible for determining IR35 status with great care as they retain responsibility for tax liability and face a huge fine if not abided by. With HMRC’s grace period of 12 months for cases that are not deliberately non-compliant now at an end, employers are understandably concerned and keen to avoid claims of misconduct and tax avoidance. As a result, many are turning to the safest option and recruiting for inside IR35 roles.

For a sector like engineering that relies on temporary resources, this is concerning. The vast majority of contractors choose this working option because of the flexibility and wide-ranging opportunities it presents. Inside IR35 roles aren’t as appealing to them as they lose much of what made them become a contractor in the first place.

In fact, we recently asked our audience: Would you pass up an inside IR35 role, even if it's for your dream company? Almost half (48%) of the participants stated they would.

Given the dearth of engineering talent across the UK, employers in the sector simply can’t afford to exclude those seeking contract opportunities. These independent professionals can be engaged legitimately, and employers should ensure they are still utilising this talent pool – compliantly of course.

As demand for engineering talent continues to ramp up, we expect to see the ramifications of Off-Payroll legislation unfold for some time to come. However, we will continue to work with employers to ensure they can access the people they need – contract or permanent – to keep projects on track.

For more information, or to discuss your hiring needs, contact us.