IR35 on the ground: Where SThree is seeing off-payroll compliance (with a little help from itself)

A bit like an interesting mix of approaches to IR35 reform which our clients are taking, there’s also a mix of opinions. For example, we disagree “there’s little recruiters can do” with end-users not engaging genuine PSCs, writes Charlie Cox, commercial director at STEM recruitment firm SThree.

To be clear though, an agency’s influence in getting a client towards outside IR35 determinations does depend on three main factors. They are; the sector to which the services are being provided, the size of the customer and third, where the agency features in the supply chain from a pay perspective.

But let’s get back to that interesting mix of approaches we’re seeing when it comes to implementing the revised IR35 rules of April 6th 2017 and April 6th 2021.

How a big-ish bank is doing off-payroll

A financial services industry customer (not one of the ‘big’ banks but sizable nonetheless) has not adopted the outright ban on limited company contractors which some large banks did when the reform struck in 2021. However, despite a sound IR35 status determination process being followed, the bank often reports a higher than expected ‘inside IR35’ percentage.  

This outcome has been problematic for project continuity on some of the bank’s larger projects, which have seen slippage in both timing and budgets as a result.

Meet the digital client whose IR35 processes are the envy of its rivals

Not seeing any such strain from IR35 compliance on its timelines or budgets is a large end-user in the digital space.

This digital client has their IR35 determination process led by their internal tax team in conjunction with hiring managers. The tax team and hiring managers have taken on board lots of information and take a pragmatic approach.

So, a bit like the bank mentioned previously, the two teams are applying the off-payroll rules correctly but in their case, they end up with a sensible ratio for where the rules apply and where the rules do not apply. This approach and outcome appears to be why their ability to attract talent is improving, and it’s improving without the need to increase budgets to cover the higher daily rates being requested by contractors if they believe they were incorrectly determined.

The even more interesting aspect for the digital client is that their approach is being noticed by their direct competitors. As a result, we’ve heard that rival companies are starting to adjust their own internal practices on IR35 compliance, to ensure they aren’t putting themselves at a disadvantage when it comes to the war on talent. 

A turnaround in Life Sciences (at least at one Life Sciences organisation)

But now let’s turn to the opposite of what contractors want to see. A significant customer of ours in the Life Sciences space made a decision very early in IR35 reform’s long and twisty journey not to engage limited company contractors at all. This is the ban on PSCs more synonymous with very large banks.

However, as some of the rates on contracts needed to be increased to make the assignments attractive to temporary professionals (and given the inevitable longer term effects that those increase have), the life sciences client recently started to change its contractor processes. That change has even resulted in the door to limited company contractors being reopened once again. 

In the same sector though, a large customer had taken a similar decision to not allow PSC contractors, saying it would only engage contractors through a PAYE setup, either by agency or umbrella company. Due to ‘developments’ with umbrella companies, and potentially other reasons, the brolly route has subsequently been closed off by the customer, and they today stipulate that they don’t want any third parties in the supply chain. The result? Agencies have to supply the worker through a direct PAYE basis only. This type of engagement and request from customers is on the rise at the current time.

Engineers -- today’s news offshore outsourcers trying to head off IR35 headaches

Similarly at the sharp end of IR35 responses as far as UK contractors are concerned, is the engineering sector.

We are seeing some cases where, following the inflated rates being requested by contractors previously deemed inside IR35, and due to the significant overall uplift in talent costs, engineering companies have started to outsource the work of contractors to offshore providers.

The overriding factor appears to be cost, as for a significantly lower price the engineers can still get the work done, in return for using a more cost-effective option at the lower end of the supply chain which appears to head off IR35 headaches.

Small is beautiful

At the opposite end of the spectrum, we have a customer who meets HMRC’s definition for off-payroll purposes of a ‘small’ company, meaning the off payroll rules are not applicable.

This small customer is a refreshing example of an end-user who actively sought to understand the rules to support limited company contractors that they engage. Despite there being very little HMRC risk to the business, contractors here who self-determine their IR35 status value the customer; the services they provide and are actively aware that the engager wants to partner with service providers appropriately.

Final thought

My team and I are proud of the work we have done as a staffing business over the last five years since the first part of IR35 reform. It’s not lost on us that the reform was at one stage binned by the government, only to be dusted off and reinstated a few weeks later. So those initial long hours that went into educating customers about the 2017 and 2021 frameworks were definitely worth it, and indeed weren’t lost, although that’s not to say that the IR35 education process is over. We can also say that had we not done this significant knowledge-sharing on the off-payroll rules, along with other recruitment firms, the contractor marketplace would be in a very different place.