Your business is growing. Right now, you’re able to rely on a contract workforce to get things done. It’s a simple, hassle-free solution that allows you to achieve your goals without being bogged down by admin and expense. It’s great for you, and good for your workers. Everyone has the flexibility they need to thrive, and your business is benefitting from it. But more regulations come into play as your team increases. You don’t want to stifle growth – that would be madness. But equally, with IR35 making managing a contract workforce a far more complex matter for businesses with more than 50 employees, you may need to pause for thought and think about how to manage the potential disruption of IR35.

Kris Simpson is the Head of UK B2C for Cool Company provides some guidance on how to navigate working with contractors in a post-IR35 world.

What is IR35 and what might it mean for your business?

If you’re currently classified as a genuine SME and have a workforce that totals far fewer than 50 individuals, including your contractors, you may not have spared the smallest thought for IR35. It doesn’t apply to you – yet. So, you can just carry on regardless. But what will it mean for you when your business starts to grow?

IR35 is the shorthand for an old piece of legislation which was reformed in 2021 and this changed everything. The aim of the legislation is to prevent tax avoidance. Fair enough. But it means that any businesses that deal with more than 50 workers are now obliged to treat contract workers who may be deemed employees, as they would any other employee. This means paying the income tax and National Insurance Contributions (NICs) of relevant contractors as if they were permanently employed by your business.

Not all contract workers will be affected by the legislation. If you use their services on a very short term or ad hoc basis, it’s possible that you’ll be able to continue to treat them as you would any contractor. Leaving each individual to manage their own tax obligations. But making that decision, identifying which of your contractors fits under the ‘deemed employee’ or genuine freelance contractor umbrellas is a challenge in and of itself. The problem is, if you want your business to grow, it’s not a challenge that you can hide from for very much longer.

How can you manage the IR35 disruption as an SME?

Although IR35 has caused significant disruption within business, the problems it raises are not insurmountable. And there are three main ways that other businesses are already using to tackle the issue.

The first is to reduce your reliance on contract workers. By taking on additional permanent staff, investing in training to enhance the efficiency of your existing workforce, and outsourcing occasional overflow to contractors, in some circumstances it will be possible to maintain business as usual. Growth may be slowed. And not all of your team members will be happy with the additional strain. But as a temporary solution, it has the potential to work.

Another option is to invest in your HR, recruiting, and accounting teams. If you can provide the training that they need to ensure they fully understand both the IR35 legislation, and how it applies to your business, it’s entirely possible to manage the new way of working in-house. But it is worth stressing that you need to be fully confident in your team’s ability to manage contractors within the letter of the law. Otherwise, you could find yourself facing hefty penalties.

And the third path is to work contractors through an established compliant umbrella company. Umbrella companiesare essentially admin managers that close the gap between contractors and the businesses they serve. A contractor will source their own work and use the umbrella company to manage the payroll for the assignment. The umbrella will invoice the client based on the contractor’s agreement and then once paid, the funds are processed through payroll and paid to the contractor. But that’s the only real similarity, because umbrella companies also manage all of the associated admin – getting contracts signed, ensuring compliance, paying tax, and making sure that the contractor’s rights – sickness, holidays for longer term jobs – are observed. It removes the burden of compliance from both businesses and contractors, allowing both parties to concentrate on the job at hand.

But of course, if you do decide to continue to work with contractors, one other significant challenge remains: finding quality contractors to work with. Since the implementation of IR35, many UK contractors have taken their skills to overseas markets, where IR35 can’t reach them. While others have simply abandoned the practice and returned to the ranks of the employed. So…

How can you attract skilled contractors to your business?

Being completely honest, there’s no great secret to attracting contract talent. You simply have to be a good client. And that involves all that you would expect it to.

So, behave fairly, professionally, and courteously at all times. Make sure that payment is just and always paid promptly – if you’re working with an umbrella company, they will manage this aspect for you. Be realistic with your deadlines, and make sure that any relevant briefs are clear and easily understandable. And provide channels for open communication, should any queries arise, or additional input be required. When you’re paying for a service it’s easy to forget that a little bit of gratitude goes a long way. But if you like a contractor and value their work, the best way to secure their loyalty is to make them feel appreciated. And it’s such an easy thing to do.

IR35 has certainly complicated things for small businesses that rely on a contract workforce. But it is not the death knell that many feared it to be. Sure, it means changing the way that you do things. But that’s not always necessarily a bad thing. And with a little luck and a little concentration, your business can continue to grow as you’d always hoped it would.

Bio: Kris Simpson is the Head of UK B2C for Cool Company and is responsible for operational and compliance in the UK.  With over 10 year’s experience in Umbrella Payroll and the Recruitment sector. Kris is Cool Company’s go-to person when it comes to changes in the UK and providing solutions that our customers need.