A 40% contractor rate increase thanks to IR35 reform? It’s achievable

The economic bounce back from covid-19 has already been pretty significant, with 11 of the UK’s 14 sectors at their highest growth output since before the pandemic; footfall for UK retail soaring 88% and the IT contractor jobs market on its strongest footing since July 2018, writes Matt Collingwood, managing director of technology staffing firm VIQU.

Money making the contractor market go round

But it’s not just the nationwide reopening that has contributed to what agency body the REC measures to be the most marked demand for IT skills on a temporary basis for 32 months (N.B. we measure it to be even higher than that).

Specifically, many of our clients have chosen to increase contractor pay rates, either due to contractors agreeing to go ‘on-payroll’ because of private sector IR35 reform (and clients choosing to acknowledge this with a rate increase), or because they want to attract an in-demand skillset which they lack internally.

How much?!

But of these two, it’s the new IR35 which is behind the biggest premiums. It’s only one example but we had a contractor who, in order to be convinced that he should stay with the client and join a payroll, held out to the last for a major pay increase. Needing to retain his services, the client obliged, handing him a 40% increase. Yes, FORTY per cent!

In many cases, we have found that client decisions to move rates upwards have been driven by:

• Fear of losing their contractors, meaning they would be unable to continue with their projects or service offering
• Being unable to attract the level of IT talent they require

Exceptions, and exempt engagers

Not every contractor is sitting on a rate increase of course. There are some clients who because of their own sector issues or organisational pressures have been ‘cost-conscious,’ and this was notable around the start of the new financial year, when IR35 reform was introduced.

But in general on contractor rates, end-users appear to be more focused on attracting and retaining the best IT talent and will do what is necessary, at least rate-wise, not to go without.

Significantly, because not all end-users are treated equally under the new off-payroll rules, we believe that ‘exempt’  small companies, and medium-sized companies, which aren’t exempt but are being more agile with their approach to IR35 reform, will snap up the best talent. This is no bad thing if you’re a contractor eyeing a contract with neither a small nor a medium-sized company. The actions of these two smaller engagers are already putting pressure on large businesses to change their generally more risk-averse approach to IR35 reform. If they don’t, they will struggle to attract the best contractor resource.  For example, last week I spoke with a programme manager at a large banking and financial services organisation who is already struggling to deliver on his projects because the talent pool he can get resource from has been severely restricted by the organisation’s decision to blanket assess all contractors inside IR35.

No truck with morphing contracts

It might interest contractors to know that where we have had situations where a client was uncertain of their IR35 position pre-April 6th, we ran the contracts up to the end of the financial year. This way once a client had made their IR35 position clear, we could present that to the contractor and allow them to make an informed decision.

In the more positive situations where clients had already made a decision far in advance of the reform date, we were able to run contracts past April 6th. Either way, we’re pleased to say we didn’t have any truck with contracts that morphed from outside IR35 to inside IR35, and if any agencies did this leading up to the reform, I would condemn both them and their conduct.

Recruitment agencies should have open communication with their clients, so I would expect them to know about such a ‘morphing’ situation early on. Withholding information from a contractor is highly unethical. I would encourage all contractors to ask for whatever written documentation the agency and its client have agreed i.e. a copy of the Status Determination Statement.

Of course, some agencies might struggle to convince clients to take the new off-payroll rules seriously. We had this very problem in early 2019 and early 2020, just before the rules’ introduction was deferred by one year. Leading up to April 6th 2021 however, we were pleasantly surprised by the vast proportion of engagers who were open and willing to having a frank conversation around IR35.

That may partly explain why rates are now heading in the right direction for many contractors who weren’t thrilled about going PAYE.

Take-home pain, HMRC’s gain

And it should be acknowledged  -- there are now more contractors than ever ‘on-payroll’ because of the new IR35 legislation. So we have seen cases of contractors experiencing a reduction in their take-home pay as a direct result of this month’s IR35 reforms.

But it should also be acknowledged – this contractor earnings dip is not because of the client (our extension rates are up seven per cent compared to the first quarter of 2021). It is really due to an increase in deductions that the move from operating one’s own PSC to joining a PAYE payroll requires in law. Therefore it is very clear who is winning in these circumstances; it is most certainly not contractors, clients or recruitment agencies – it’s HMRC.