Looming changes to IR35 regulations have added complexity to an already disruptive business environment, with businesses grappling with a capability base they have taken for granted for decades.
According to recruitment agency Robert Half UK, three out of five (62%) medium and large-sized, private sector businesses are concerned about missing out on skilled contractors. The challenge presented by this disruption is uppermost in the minds of change delivery and transformation leads, who are ultimately accountable for delivering business results.
In our view, IR35 is a much-needed disruptor to prevalent delivery models. It presents businesses with a worthwhile opportunity to re-evaluate and re-scope their approach to their transformation capability, something which is ever-increasing in importance. This, in turn, provides an opportunity to trigger significant improvements in change outcomes.
What is IR35 and how is it changing?
IR35 is a regulation that governs eligibility criteria for tax exemptions so that contractors working as ‘disguised employees’ cannot take advantage of personal service company (PSC) arrangements. The new IR35 rules, set to come into effect in April 2020, transfer the determination of this exemption from PSCs and their umbrella organisations to those companies procuring contractor services.
In most cases, contractors are providing short-term services beyond business as usual. By and large however, their current arrangements do not meet the burden of proof required to be reliably IR35 exempt. So, continuing as they are past April 2020 puts hiring companies using these contractors at very real risk of audits and fines from HMRC.
What options are available to address the IR35 challenge?
- Backfilling contractors with full-time employees is not the answer. The lead time is long and it is difficult to recruit for a full spectrum of capabilities. Moreover, the specialist transformation skills may not always be required post programme and project completion, while the spike in operating expenses is likely to make a noticeable dent in budgets.
- Moving the contractor base within IR35 can be the simplest solution but increases NI costs and risks an exodus of contractors due to decreased earnings – depending on the IR35 approach adopted by competitors.
- Alternatively, contractors can move to IR35-compliant statements of work, at minimum demonstrating independent activity and reporting lines, substitutable resources, as well as delivery and financial accountability for clearly defined deliverables. Re-evaluating contractors in programmes and projects to an IR35-compliant model is, however, incredibly burdensome given the number of contractors involved and IR35 exemption criteria. Additionally, a structure will need to be implemented to govern and assure compliance. Giving way to these requirements could also result in a stampede of other transformation leads asking for the same.
- Moving contractor needs to a managed service provider is another option. While they may accept the work, companies are likely to face resource quality issues. Transformation activity requires agile responses to unforeseen and unstructured problems. In contrast, managed service providers aim to provide a business-as-usual service that is suitable where requirements are clear and consistent. Not only do managed service providers generally lack a responsive and solution-oriented capability, often they are not financially incentivised to provide it due to relatively rigid contractual terms.
It is inevitable that interim measures will need to be taken, most likely in the form of one of the above options. But the reality is that none of these options present a strategic answer. In fact, we suggest placing strategic transformation partners at the core of your change agenda.
The case for a strategic partnership
What does a strategic partnership really mean? Change delivery is not formulaic. Committing a specific number of resources for a specific number of months, as is prevalent in the traditional contractor model, will not guarantee results. Instead, it is perspective, approach and accountability for the work that will generate lasting change. This requires the organisation to align itself to invested, expert third parties that can drive results through the peaks and troughs of the project – the type that will roll up their sleeves when the going gets tough.
A true strategic partner is:
- Accountable and results driven. It is embedded in their culture and commitment to go beyond minimum delivery. They live and breathe change and are truly vested in delivering the best results for your organisation.
- The right size to be focused on your business. They need to be big enough to meet your needs, but small enough to ensure you matter – prioritising your requirements and investing the right level of leadership in the team.
- A genuine partner with the right value set and approach to consulting. Their people embed themselves in the business and work with you rather than for you, driving benefits and outcomes, as well as helping to upskill client teams for the future.
- Has EQ as well as IQ. They keep pace with radical change by only hiring consultants with strategic agility and analytical skills coupled with high awareness of stakeholder mindset and needs.
- Supports the most important challenges. They will not shy away from the difficult projects, successfully helping to tackle the most pressing and impactful challenges. They have the specialist capability and experience needed to determine the right approach to delivering best-in-class transformation and delivery methods tailored to requirements.
- Consistently provides the A-team. No B-team will do, as every team member combines strategic consulting skills and extensive hands-on delivery experience to solve the biggest challenges – leaving when the job’s done without waiting to be asked.
Achieving lasting change
At Gate One, we have extensive experience as a strategic consulting partner of choice. We are driven to tackle the difficult projects, delivering lasting and effective change. We achieve this by working side by side with you, building further your change capability to allow more meaningful change long after our consultants have left.