How IR35 is rigged against contractors, in seven recruitment steps agencies perpetuate

Having founded and run successful businesses since I left education, ranging from a recording studio to a pre-dotcom bubble web development company, I come from a self-managed business background.

Serving me well in other enterprises I’ve had, whether it was in video game development or podcasting, this ‘DIY’ commercial approach has set me apart from what some may consider ‘regular’ contractors, especially with understanding, caring about, and keeping at bay IR35, writes Chris Sebok, founder of software consultancy Shadow Moses Development.

I’m no employment status lawyer but I do read and try to understand legislation and follow IR35 case law with interest – including intransigent HMRC redoubling its IR35 efforts against one presenter (Adrian Chiles) following it failing with another (Kaye Adams).

What is a contractor? Not enough agents/clients act like they know

In short, I know what a contractor is. But it seems a large number of contractors, service providers, and crucially for off-payroll working liabilities, recruiters and clients, don’t.

With the OPW rules now in full swing in both the public and private sectors, I’ve observed (and been subject to) some very worrying recruitment trends that need to change if the IR35 ‘game’ is ever to NOT be rigged against us contractors.

Unfortunately, there’s a seven-step process afoot perpetuated by client-led recruitment agencies that stacks the OPW deck against the Personal Service Company contractor from the off.

Jan at Tasked represents all that’s wrong with IR35-governed IT contractor recruitment...

Meet hypothetical agent Jan, a consultant at a jobs agency called, let’s say, Tasked.

Jan needs to make a contractor or consultant placement. Generally, Jan would follow this high-level, seven-part process:

1. Liaise with the client and ascertain requirements.

2. Negotiate commission and terms with the client.

3. Determine the contract’s IR35 status.

4. Write the job advert and post it on the website of Tasked.

5. Filtering of applications and fielding calls from candidates.

6. Booking interviews and gathering feedback from the client.

7. Making a verbal offer and arranging written contracts.

So a simplified but straightforward contractor recruitment process, on the face of it.

On closer inspection however, some details with the seven parts of this contractor recruitment process objectively contribute to the mess that IR35 / Off-Payroll Working has become.

And thanks to agencies and clients being complicit, they make it an IR35 mess which contractors cannot easily extricate or untangle themselves from.

1. When Jan speaks to the client, our agent does very little to educate them that hiring a contractor is different from a temp, or even an employee.

Jan’s busy as an agent and likes to assume knowledge.

By omitting this key step of educating the client, Jan is from the start stoking the client’s expectation that like conventional staff hiring, its organisation will have an element of control over the candidate – but control just isn’t present in a conventional B2B relationship.

Instead, agents should be clear with clients that contractor terms are purely B2B, and no aspect of the contract would allow any level of control over the contractor.

2. Now Jan has established the client wants Tasked to source a non-permanent worker, our agent moves to negotiate the terms/commission.

The client has specified that their budget is £500 a day, so Jan informs them that 10% commission + VAT would mean they are looking at £660 in total.

Having heard last week that the UK is now technically in recession, the client baulks.

The contractor’s take-home ends up at just £378 a day. Jan then informs the client that two contracts will be in place – one between Jan/Tasked and the client, and the other between Jan/Tasked and the contractor.

While this ‘middleman’ arrangement is beneficial to Jan, it does neither of the other two parties any favours

In fact, it stifles relationship-building and negotiation between the parties; potentially increases costs for the client, and reduces profits (considerably) for the contractor.

Instead, either the client or the contractor should pay the agent a ‘finder’s fee’ when a placement is made, then negotiate terms between themselves.

I lean towards the fee being paid by the contractor – as the service provider – providing their own terms and paperwork for the client to sign; this isn’t an employment relationship; it’s an offer of services in return for agreed remuneration.

3. Due to the OPW rules, Jan knows there must be a determination of the candidate’s IR35 status.

Jan has three options:

1) Educate the client on IR35 and OPW, assess the contract, with a view to a Status Determination Statement (SDS) being issued.

2) Advise the client to side-step the complications and risks of IR35 by using an umbrella company.

3) Advise the client that their organisation is, in Jan’s words, “exempt from IR35” because their organisation qualifies as a ‘small company.’ Both parties then (wrongly) believe the result would be that the contract is ‘outside IR35.’

Busy as always, Jan advises the client to go for option two, because it’s easier for everyone (everyone except the contractor).

Option one appeals to very few clients (or agents); there is a significant administrative overhead and risk to adopt. The only incentive to offer ‘outside IR35’ work is for highly specialised contracts where the client is desperate. I’ve seen this happen following a failed attempt to find an ‘inside IR35’ contractor. Such attempts can go on for weeks, and months, in vain.

Option two is currently in the contractor market the ‘go-to’ for most clients and agents, because only the contractor seems to lose out. That is, until the contractor finds a better offer and jumps ship mid-project, leaving the client in the lurch.

Option three is the most damaging option. Almost every contract I’m seeing which is advertised as ‘outside IR35’ carries such status due to the ITEPA Chapter 10 small companies’ exemption applying.

Assuming our client does qualify as a small company (and therefore doesn’t need to consider the OPW framework), it is neither the client nor the agent/agency (Jan/Tasked) that should be advertising the contract as ‘outside IR35,’ because ITEPA Chapter 8 (‘old’ IR35) is still in play.

In this case, it is the contractor who takes on all financial risk for paying their taxes correctly. (N.B. These conversations are proving the most difficult of discussions; agents are personally offended when you inform them that their understanding of ‘outside IR35’ is limited. Similarly, clients who get word of a disagreeing contractor – or just hear the contractor isn’t accepting of employee-style treatment, tend to brand the contractor ‘difficult.’)

Instead, Jan should pursue option one, but for the reasons stated above, agents who do so are few and far between.

4. Jan then gets to work writing the ‘job’ advert – with some (or all) of the words being provided by the client.

You guessed it! The ad ends up reading like a permanent job description, with a full-time-esque title to boot. This further reinforces the employer-employee relationship that the client now has no reason to deviate from expecting.

Instead, Jan should train - or engage the services of someone who has experience - in gathering high level project requirements. If Jan seeks help, such a professional should review everything from step one.

Contractor job adverts should anonymously list the project deliverables, timescales, and milestones.

If a client cannot do this, they need a temp or an employee -- not a contractor.

When reading job specs, I spend most of my time squirming over the wording. I instantly reject the numerous (numerous) opportunities that sound like I’ll be a ‘permie-tractor’.

At no point should any party in the chain (other than the contractor) be specifying how the contractor should be delivering the services that are required, of what their ‘job responsibilities’ are. Clients need to accept some business risk, and contractors should be held accountable for missteps or mistakes they make when delivering the services.

5. To Jan’s delight, candidates start rolling in.

In today's currently saturated IT contractor jobs market, the candidate response-volume is in the hundreds for every single opportunity.

In Jan’s case, though, most applicants unfortunately don’t have the relevant experience (VIQU agent Storm Robertson attested to this surge in inexperienced candidates only last week). Jan found some of the contract-hopefuls had no UK work rights.

Undeterred, Jan adds the dozen or so remaining candidates to an Applicant Tracking System (ATS), but the software then rejects most of them because they don’t have the right keywords on their CVs.

Jan contacts between three and six of the most relevant candidates. Most are desperate for work, so they say almost anything to get shortlisted.

A few remain stalwartly independent, rejecting any notion of ‘inside IR35’ status and they attempt to educate Jan on IR35 status issues/legislation. Jan doesn’t like this and ensures these two ‘difficult’ candidates don’t proceed and so are removed from the process.

Instead, Jan should put forward the most suitably skilled candidates for the opportunity. Jan should also check the ATS which Tasked uses and overrule the software where a skilled applicant has simply missed a few keywords. Jan should eliminate contractors saying almost anything to get shortlisted, however she shouldn’t eliminate contractors for personal reasons.

6. Jan books four candidates in for interview -- only three turn up.

The client doesn’t like two of the contractors, but the third candidate ‘has promise,’ so they make a lowball offer.

Jan probes the client for feedback for the two rejected candidates but gets brushed off with the standard responses of ‘they’re not a cultural fit’ and ‘they have too much experience.’

Jan ghosts the candidates, out of embarrassment to provide such poor feedback.

Instead, Jan should let the candidates know why, in Jan’s assessment, the client didn’t bite, potentially relaying the reasons Jan got told, as well. Jan should be aware that often, to execute a contract effectively, culture fit doesn’t matter to contractors or the recipients of their services.

7. The final candidate is forced to accept the lowball, inside IR35 offer.

And understandably so -- the market is in decline, the economy is in recession, they’ve been looking for work for 6+ months, and their war-chest is close to empty.

Instead, the contractor should leverage the likelihood that they are, in fact, the last candidate standing, and at least look to negotiate aspects of the contract to make this unpalatable gig, caught by IR35, slightly more palatable.

A simplification, but also a microcosm of IT contracting in 2024

Almost needless to say, this is a highly contrived, simplified scenario – any number of things can change a contractor candidate’s trajectory, and of course there are many variations of agents out there.

In fact, some agencies do distinguish themselves from this traditional recruitment process (simplified above into seven steps).

But often in the temporary labour market for professional services, these fairer, more innovative, IR35-knowledgable, less time-poor agencies struggle. Clients don’t want complications, they want quick and easy solutions, because ultimately, they are focussed on their own business and profits, NOT cumbersome, hard-to-understand legislation which their internal staff are frankly not trained or equipped to properly understand or administer.

All the while we suffer. Whether it’s from low take-home, needing to have awkward conversations with agents and / or clients who don’t ‘get’ the OPW rules, or being forced onto the ‘PAYE Contractor’ model, the once bonafide, independent contractor loses out.

Reminding me of the Loan Charge APPG’s April 2021 inquiry “How Contracting Should Work,” I’d go so far as to say the above seven steps are ‘Why Contracting Isn’t Working.’ And worryingly, contracting won’t really work as it should until IR35/OPW is either properly addressed by the government or our supply chain partners like Tasked – a partial anagram of ‘Stacked’ – stop engaging us on IR35-affected contracts with the deck stacked against us from the starting pistol's very first shot.