UK Tech Sector Will Take a Knock Over Brexit and IR35

5th February, 2020
By 5. February 2020IR35, IT
UK Tech Sector Will Take a Knock Over Brexit and IR35

There are warnings that the IR35 reforms will hit the tech sector harder than any other market. The reforms, due to be introduced on April 6th 2020, could heavily affect investment in the tech/IT sector. Most industries are reliant on niche tech skills to keep their IT infrastructure up to date. However, Brexit and the impending roll-out of IR35 in the private sector has meant that UK businesses paused more than £27 billion worth of IT projects since last March.

When the reforms were applied to the public sector, many contractors responded to blanket decisions by moving into the private sector. This left key projects like HS2 and Transport for London with severe skills shortages, while some government departments lost up to 40% of their IT contractors. With IR35 active in both the public and private sectors, this could see another mass exodus of IT contractors into permanent positions or overseas projects.

Many IT projects are too important to delay indefinitely and niche IT skills are already heavily in demand, with employers reporting shortages in this area. Contractors are the people who generally deliver change within organisations, and this, along with ensuring the smooth continuation of operations, will be vital in the coming months as the business sector finds its feet post-Brexit.

Contractors are also the backbone of our tech-driven start-up sector. Start-ups can’t afford to invest in a long-term mix of talent, and so hire for urgent need, not long-term strategy. For tech-based start-ups this often means that they use initial hard-won investment to hire developers to perfect their platforms. Contributing 47 per cent of revenue to the UK economy, small and medium-sized enterprises (SMEs) play a key role in boosting productivity – but need support to expand business and increase impact.

Skilled IT contractors are critical to the UK’s economic growth, yet there’s a very possibility that IR35 reforms risk permanently damaging this vital resource. This week IBM set out plans to phase out the use of personal service company (PSC) IT contractors from its workforce to ensure compliance with the incoming IR35 reforms. The tech giant joins 20% of UK businesses that are axing contractors completely to ensure they are compliant ahead of the April changes.

By blocking contractors from operating through their own limited company, there’s an argument that it compromises their professional status. These are individuals who have grown their own client base, invested in their own specialist training and grown a solid reputation under their own brand, many for upwards of 10 years. In effect, the new rules deskills and undermines their pedigree.

Suggesting that they should be taxed in the same way as an employee, yet without any of the benefits of employment, means that they won’t be able to make provisions for their future or invest in their professional development. There are also reports of day rates being pushed right down with contractors expected to absorb the costs of employers’ NI and the Apprenticeship Levy. These heavy-handed tactics increase the likelihood that skilled IT contractors will refuse to comply with these policies.

Contracting stakeholders have repeatedly warned about contractors walking off IT projects in the private sector if their engagers are deemed not to be conducting fair IR35 assessments. The risk to digital and cyber projects means that some companies will seek to lock down IT talent by offering permanent positions where they can. However, this will require significant funds since IT contractors are likely to turn down unfavourable contracts, while others will refuse to go permanent for fear of retrospective action from HMRC.

With IT skills in global demand, many commentators are seriously concerned that IR35 reform will see the UK contractor pool dry up, making it hard to find skilled IT staff to project manage innovation programmes. All this is taking place in the context of a European contractor market that is expanding and increasingly more welcoming to the freelance economy. Contractors and freelancers are one of the fastest-growing segments of the EU labour market, now totalling about 11 million, with a large percentage of these working in IT/Tech.

IT contractors are already leaving for overseas hubs along with start-ups. The uncertain impact of Brexit combined with regulatory burdens means that many businesses see leaving the UK as their best chances of growth. Last year, Valuer rated the most attractive cities for startups across the globe as Berlin, Tel Aviv, Helsinki and Stockholm. Access to talent, low living costs, high levels of government support for start-ups and ease of movement all pipped London, which fell out of the top five behind India.

A large number of businesses are in the process of moving their development projects to India, with one contractor commenting about his engager: “The business felt it would leave itself badly exposed if it chose to bring in contractors outside of IR35. The cost to hire on PAYE wasn’t sustainable due to the increases in taxation. They have been left with no alternative but to offshore their development project to India.”

According to the notes that accompanied the upcoming budget and the off-payroll legislation, there are 60,000 clients, 20,000 agencies, and 400,000 contractors who will be impacted by the off-payroll reforms. This indicates the scale of the task involved when it comes to educating everyone in the supply chain and making status assessments. However, the resources that HMRC has given enterprises to do this, along with their time scale for implementation, is so clearly inadequate that it’s literally driving business and investment away from UK shores.

Of course, not all contractors will be in a position to leave the UK, while many won’t want to. The good news is that the high demand for tech skills means that although this sector will take a knock in the coming months, it’s also set to be one of the fastest to bounce back. The best policy is to seek immediate protection from widespread blanket policies. By using an umbrella company to remove the IR35 risk posed by the new reforms, the contractor will be afforded time to watch the situation unfolding light of Brexit, the IR35 Review and the incoming April reforms.

This content has been supplied by IR35 Guru.

At ContractingWISE we can offer you an IR35 solution to suit your personal circumstances. We have access to an excellent range of specialist umbrella companies, and can also help you with suspending or closing your limited company, depending on your situation. If you’ve been affected by the IR35 reforms and feel unsure about your position, get in touch with us and we’ll talk you through your options. To talk to a member of our team, call: 0203 642 8679