SAP Partner

IR35 Option 2: Outside IR35

By Jonathan Hurren

Outside IR35

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If you use SAP contractors to deliver projects you will have three options to engage them after April 5th 2020 and the advent of private sector IR35. Information  on Option 2: Outside IR35 below:

The shifting of responsibility for IR35 assessments from contractors to their private sector clients next year is causing huge concern in the SAP community.

Middle and large sized firms who will be covered by the new rules are concerned they do not have the resources to individually assess all limited company SAP contractors for IR35 status and could be caught out by HMRC for making wrong determinations.

Meanwhile SAP contractors fear they may be automatically forced on to PAYE terms by clients taking a safety first blanket approach and calling an end to all off-payroll contracts, and many have indicated that if this happens they will look elsewhere for work.

In the ensuing confusion, both contractors and clients are crying out for answers.

As an SAP recruitment specialist bluewaveSELECT has been working on a solution which takes away the threat to our SAP contractors of being forced on to the payroll, while carrying out all IR35 assessments for our clients free of charge.

More on that to follow. But first, a brief overview of the changes and our assessment of the risks companies who do not respond in the right way to IR35 changes face.

IR35 was first introduced back in 2000 as a tax avoidance measure targeting ‘personal service companies’, with contractors responsible for determining their own IR35 status. In 2017 a change saw public sector organisations given responsibility for determining their contractors’ individual IR35 status. From April 2020 medium and large sized private sector firms will also bear the responsibility for determining the IR35 status of all their off-payroll workers. The fee-payer (usually a recruitment agency) will be responsible for deducting the relevant tax and National Insurance contributions at source.

Firms will be required to provide the agency and off-payroll worker with the determination result in each case, as well as the reasoning on request. To say the changes have not gone down well with the estimated 170,000 self employed UK contractors who are set to be affected would be an understatement.

A recently published report by specialist law firm Brookson Legal Avoiding an IR35 Talent Drain  featured by online tech publication The Register, includes a survey of more than 500 contractors which found:

  • Nearly a quarter said they don’t fully understand the changes
  • 83 per cent had still not had a conversation with their current client about IR35
  • Only 22 per cent believe their client will make a correct decision
  • 37 per cent would never consider moving to staff status
  • 59 per cent would consider moving to another client if they were assessed as being inside IR35
  • More than half thought the changes would discourage people from starting as contractors in future.

In an earlier survey this year of more than 500 firms who hire contractors, also commissioned by Brookson Legal, nearly three in five directors said they would take a blanket approach to managing IR35 as they did not have the resources to assess individual contractors.

The financial services sector certainly seems to be adopting this stance; in recent weeks Barclays, HSBC and Lloyds have all announced they will in future only engage contractors on their payroll on a PAYE basis.

Companies considering a one cap fits all solution, favouring PAYE staff over contractors, arguably run the risk of losing access to the very best SAP professionals. They will favour contracts that are outside of IR35 where they will earn more, not being subject to PAYE and National Insurance.

This risk could prove very costly to companies going through SAP business transformations, which requires the support of the very best SAP experts to ensure partners design and delivery the right solution for the business. Without the ability to engage with independent contractors who are working on the client-side, firms run the risk of failed programmes due to lack of independent governance.

Companies which decide to adopt a blanket ‘inside IR35’ policy could try and attract SAP specialist contractors by increasing day rates to cover the additional tax deductions, although that would mean a significant cost increase to deliver successful SAP programmes.

Another risk to companies scrapping all off-payroll commissions is with existing contractors, who may fear a change of status from outside to inside IR35 will attract the unwanted interest of HMRC. The concern among contractors is that HMRC may decide that they should have self-classified themselves as ‘inside IR35’ with that client and seek retrospective tax.

Given the differing responses companies will make to the IR35 changes, it is probable that the industry will see a split in talent in the market with the most experienced SAP contractors chasing work outside IR35. Firms that do not pay more to mitigate the IR35 impact will likely end up appointing a project team of less talented SAP contractors with ‘inside IR35’ status.

Lessons learned from the public sector

One of the key lessons businesses can learn from the public sector’s experience of implementing IR35 is the risk posed by rushing into a blanket approach such as ending all off-payroll contracts. Short of time to prepare, relevant expertise and resource, many public sector organisations took this route. The result was either a loss of key talent, putting programme delivery at risk, or a significant rise in delivery costs via additional statutory employment payments and day rate increases.

In their report ‘Preparing for IR35 – Lessons learned from the public sector’ Hays found many organisations were forced as a result to reverse their blanket approach and now test individual assignments.

Meanwhile employment law experts Brodies recommend firms formulate an internal IR35 policy which considers risks including losing access to talent, successful HMRC challenges and identifies how determinations on IR35 status will be reached. They recommend companies ensure that for each case the contract and working arrangements reflect a self-employment B2B arrangement to protect against any potential HMRC challenge.

With many clients and contractors still unclear on how they will deal with the huge issues the new income tax regime poses, bluewaveSELECT has partnered with an IR35 specialist to develop a comprehensive solution.

To comply with the new rules, bluewaveSELECT will arrange all our contractors’ IR35 assessments on behalf of clients, who will be fully insured for each contract to cover all potential legal costs, tax, interest and penalties. All IR35 determinations will be shared with the client for approval and the full compliance paperwork provided.

We have already assessed that due to the project driven nature of SAP contracting, right for substitution, key deliverables and day-today working practices, around 98% of all our placements will be deemed outside IR35. But if a contractor is deemed inside IR35, we will provide the PAYE model needed.

Another option we will offer is a true IT services model where bluewaveCONSULT, as a boutique third party SAP consultancy, will employ the SAP experts to deliver a formal Statement of Work (SoW). This will take away the responsibility of the SAP end-user organisation to assess roles.

We are contacting all our clients and contractors over the coming weeks to inform them of the new IR35 solutions we are offering to ensure they are geared up for the big change in April 2020.

Are you an SAP consultant or a company requiring SAP expertise? Contact or call +44 (0) 1423 559 559 for advice on IR35.
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