IR35 Change Brings Opportunity: Public Sector to Engage SME's Now
There has been a lot of talk recently about the UK Government’s planned changes to IR35 – the tax arrangements regulating self-employed IT contractors.
As it stands, the current system does not require clients to deduct PAYE tax or National Insurance at source. The responsibility for declaration is placed on the contractor.
For all public sector clients, this is due to change on the 1st April when responsibility for IR35 compliance shifts from the individual contractor to either the client or recruitment agency.
With an estimated 20,000 public sector contractors being affected by the change, it is not surprising that a heated debate has started on various IT web sites and forums. HMRC hopes to raise £400m from the new procedures governing self-employed status.
While a wide range of possible implications have been discussed, the online debate has focused on the potential impact in four main areas:
- Impact on Contractors – predictions are being made that many contractors will simply ‘jump ship’ to the private sector (where the new rules will not apply) or, to compensate, will increase the fees they charge recruitment agencies. The agencies, in turn, will have no choice but to pass the fee increase on to their public sector clients.
- Impact on Public Sector IT Projects – just at a time when the digital transformation of public services has started to gain momentum, major concerns have been expressed regarding the potential impact that a mass exodus of high quality IT contractors will have on current and future transformation projects. The alternative is a substantial increase in IT costs, with suggestions already being made that some government departments are encouraging their IT contractors to increase fees by 20 per cent to avoid this exodus (UK.gov tells freelance techies to slap 20 per cent on fees as IR35 tax hike looms). The potential increase in costs will take place at a time when public sector budgets are already becoming very tight.
- Impact on the IT Recruitment Sector – with the potential for a significant drop in the number of contractors working in the public sector, IT recruitment agencies, not surprisingly, have raised serious objections to the new rules, especially those with a significant presence in the public sector contracting market.
- Competition in the sector – finally, concerns have been expressed that the main ‘winners’ here will be large IT companies and system integrators who often rely on offshore resource.
At Bridgeall, we are very aware of the sensitivities and strong opinions being expressed regarding the new compliance regulations. The new rules represent a fundamental change in the ‘status quo’.
While strong opposition is being expressed, it is very unlikely that the legislation will be changed at this late stage. With this in mind, we should be looking for positives in the new regime – for every ‘threat’ there is a corresponding ‘opportunity’.
The threat of increased fees from the contractor channel will significantly reduce the price differential with SME’s. While large systems integrators may benefit from the coming changes to existing IR35 rules, it will also present opportunities for informed public sector procurement teams to engage with SME IT suppliers, especially those with unique capabilities and specific expertise built on a permanently employed UK-based workforce.
As a nation, we can use the new regulations to grow and strengthen our existing pool of high quality SME IT companies keen to work as partners on large public sector contracts. The increased business secured by SMEs will in turn drive up the need for permanent resource thereby creating opportunities for local recruitment agencies.
Building a strong base of SME IT suppliers, working in partnership with systems integrators and recruitment agencies, is critical to delivering the public sector digital transformation agenda. With SMEs being a major driver of economic growth and employment, it is also critical to the future competitiveness of the UK economy.
Becoming a world class digital nation requires world class digital companies. The public sector should grasp the opportunity to directly support that by engaging the greater agility, delivery certainty and better value provided by SME’s now.