IR35 (and the paradox in Transformation)

IR35 in Transformation is an interesting topic.  Transformation and Change typically sits outside Business as Usual. Historically organisations have relied heavily on consultancy, interim, or contingent support to take them through peaks and troughs of transformation, enabling them to deliver differing skill sets in line with their change ambitions.   This flexible resource has been a critical part of many organisations’ approach to delivering change and therefore the strengthening of the IR35 legislation has given many organisations food for thought.

Looking at IR35 from a broader perspective and reviewing previous trends from the public sector and the ‘false start’ in 2020, Norman Broadbent found several key themes emerging.  These earlier implementations of IR35 resulted in an increased use of consultancies into organisations to avoid IR35 altogether; a higher use of permanent employees; day rate interims working on a PAYE basis through umbrella companies; and an increased use of Fixed term contracts.  All of these actions were associated with additional cost of some kind to the businesses involved:  Much higher rates of working with a larger consultancy, Interims moving to PAYE having to absorb the additional costs, Fixed term contracts taking the risk away from organisations and onto interim consultants with none of the extra financial reward.  This way of working was enabled by the pressure in the market and the lower demand for consultants so simple economics made this approach viable.  However, the picture in 2021 is a rather different one, such as the positive reports on the UK economy beating expectations, and consequentially this will affect the availability of key skills and increase pressure on demand. Undoubtedly organisations will be required to shift their ways of working to accommodate.

Some early observations:

  • In some organisations we have seen an insistence on working through PAYE umbrella organisations. To date, we have seen the consultants taking on the additional cost, effectively taking a cut in their daily rates.  However, as the economic situation readjusts post Covid it is likely that there will be an increase in day rates as organisations compete for key skills.
  • Businesses are upskilling and getting a better understanding of when and how to use flexible consultants. Our Clients’ change portfolios are now undergoing regular reviews to establish exactly what they need to achieve to enable their strategic goals. Rather than going through resource requests, the shift is driving them towards more of a ‘statement of work’ and deliverables-based approach, enabling them to outsource work to consultants as a work package.
  • Business change and vendor management is crucial to the cultural change that organisations need to go through post IR35. How you treat consultants who are partnering with the business and setting up governance standards which can monitor these parties against key deliverables.  Understanding the consultants are now a service organisation based on outputs rather than treating them as an individual will be a major change for a lot of clients.
  • We have found established consultants within organisations have taken control of programmes and taken on risk around delivery, in some cases they have taken on the project team within the service offering showing increased scope and complexity, offering benefits to the clients.

So, it is clear to say that within the change and transformation market the lines around IR35 are not clear cut. While the sector anticipates that the regulations will change the way some parties operate, it is not yet clear which practices will change the most – and who will bear the bulk of the financial burden. It seems fair to say that as we emerge from the shadow of the pandemic, and working practices normalise, and change programmes accelerate, there may be further adjustments as businesses compete to attract the best change and transformation talent.  Working in partnership with our clients as we navigate the changes over the next year will be critical, ensuring that we get the service model set up in the right way.

If you are interested in understanding how Norman Broadbent can assist your organisation during these changing and challenging market conditions, please reach out to Daniel Bruce via Dan.bruce@normanbroadbent.com for an initial confidential discussion.