This guest post comes from Romy Hughes, director at Brightman.
Some aspects of the public sector, particularly those running IT transformation projects which rely so heavily on the flexibility of contractors, have been frustrated by the perceived block on this flexibility by IR35. But they shouldn’t be worried, as the public sector already has a ready-made solution which delivers the flexibility they need from contractors while still complying with IR35. The problem is that too many aren’t using it.
I am of course talking about the framework agreements. But why are so many in the public sector still not using them to obtain the flexible resources they need in an IR35-compliant fashion? The same reason they don’t use the frameworks in many other contexts – they either don’t know about them, or don’t want to use them.
IR35 recap
IR35 applies to those supplying or delivering services to clients via an intermediary, most often a limited company, but who would be an employee if the intermediary was not used. The question for employers (in this case those running public sector projects) therefore comes down to this – do I deem a particular contractor to be a disguised employee (i.e. within IR35 so should be on payroll) or a self-employed contractor which sits outside of IR35.
Since 2017, those in the public sector have had the responsibility to determine the IR35 status of their contractors (prior to that the responsibility lay with the employee themselves). From April 2021, this same responsibility will be extended to those in the private sector too. This change matters to the public sector too, since many public sector projects are delivered by private sector companies that will soon be faced with a new compliance milestone.
Unintended consequences
There is a cost to assessing whether the contractors in your supply chain sit within or outside of IR35. We saw this in 2017. Making the assessment is a complex and time-consuming task, and since there are stiff penalties for getting it wrong, many simply don’t want to take the risk. In 2017, many public sector purchasers erred on the side of caution and threw many of their contractors into IR35 anyway, even if they technically qualified for exemption. This not only raised the tax bills for many contractors unnecessarily, but also reduced the flexibility of resources for public sector projects since there were fewer contractors available (as many had been swallowed up as employees within IR35, or potentially changed professions or sought other contracts where they could remain outside of IR35). There is a risk that history will repeat itself when IR35 responsibility is extended to the private sector in April 2021, but it does not have to be this way.
Use the frameworks to stay compliant and retain flexible resources
The majority of the frameworks provide a ready-made solution for IR35 compliance – providing you choose the right ones. The distinction is choosing a framework which specifically delivers “outcomes” rather than “services.” The majority of frameworks, including G-Cloud, Crown Hosting, Data and Applications Solutions, Technology Services etc., are largely outcomes-based, so any resources procured through them will usually be outside of IR35.
Those frameworks that provide specialist services rather than outcomes, such as Digital Outcomes & Specialists (DOS), can still provide resources outside of IR35, but you need to do a little more work to ensure compliance. This is because the Digital Outcomes and Specialists buyers guide states:
“Buyers can only use the Digital Outcomes and Specialists framework for workers who meet the rules for working off-payroll (known as ‘outside IR35’). Buyers are responsible for checking whether workers meet the rules.”
Providing you are able to check the IR35 status of the specialists you employ through DOS (and it is in the interest of those specialists to help you do this) there is no reason why even the DOS framework could not provide an easy path to IR35 compliance.
2021: the tipping point for frameworks?
The role IR35 could potentially play in driving more public sector organisations to use the framework agreements this year could be a very positive unintended consequence. The frameworks already provide many advantages which are sorely under-utilised by many in the public sector, such as lower cost of delivery, simpler procurement, pre-approved terms, etc. Many of the frameworks still need to win the “It wasn’t built here,” battle where many in the public sector still prefer to use their own systems and people, many are learning that they provide the fastest, cheapest and most effective way to deliver services. Perhaps in-built IR35 compliance will be the tipping point for many in the public sector to explore frameworks for the first time.