IR35 and unintended consequences

IR35 rules are changing.

Across the local business sector, a great deal of work has been and is being, done to get to grips with the new legislation. As ever though, as with any legislation, the impact could be more far-reaching than first anticipated with a number of unintended consequences.


IR35 is designed to assess whether someone is genuinely a contractor rather than a so-called disguised employee, for the purposes of paying tax.

In April 2017, the government amended the legislation so public sector organisations employing contractors were responsible for deciding whether they were inside or outside of IR35. And next month, the private sector will follow suit.

Various approaches

As we all know there are a few different solutions to the IR35 conundrum.

A common outcome we’re discussing with clients is the impact of them adopting a ‘staff model’ where the contractor converts to a staff contract. It seems straightforward: the end-user status is defined, with aspects such as taxation taken care of by PAYE — so why the concerns?

Well, it’s the less obvious issues that are worth checking.

Like all insurances, death in service and income protection policies have scheme-specific terms and conditions — the one to watch here is the policy tolerance limits.

These are the ‘trigger limits’ where the insurer wants to retest the rates to make sure what they are insuring is a quantified known risk as it may differ from the risk first underwritten. So, as an example, if you employed 250 staff, and have converted 60 IR35 contractors to staff contracts, you’ve likely breached your tolerance and you are looking at a rate retest – and as we know rates don’t usually go down.

There’s also another impact to consider as a significant number of IR35 contractors need to go offshore, albeit on an ad-hoc basis. This may not seem as obvious, but a change in scheme profile and a higher percentage of offshore workers will likely mean either an increased cost or lack of insurers willing to quote.

Either way, this could significantly affect the budget figures for the 2020/21 financial year.

Impact automatic enrolment

Next, there’s automatic enrolment.

You need to be careful as you are likely to have employer duties where these individuals are deemed as workers or subsequent jobholders and you don’t want an automatic enrolment breach.

And perhaps the biggest factor longer term is engagement and discretionary effort.

The individuals affected have been ‘shoe-horned’ into an environment they didn’t necessarily want to go. This needs careful handling.

Not only has their relationship with the company changed — many haven’t been ‘staff’ for years — a standard benefits package doesn’t suit their needs, and they want something different: as contractors, they were accustomed to setting out their requirements and they will be looking for help to adjust.

Support available

As with any legislation that affects an employees’ working relationships with their employer or affects their pay and tax, it is an emotive subject, so getting it right’s crucial for that fine balance between budget control and workplace morale.

And that’s where we come in.

Acumen Employee Benefits has an experienced team with great experience in designing and putting in place an approach that works for our clients.

For further information contact Tel: 01224 392434