This article looks into challenges UK businesses are facing today as a result of HMRC regulation and IR35 in particular and shows how using Extended Software Teams built offshore or nearshore can be a good response to those challenges.

What is IR35?

IR35 refers to “the UK’s anti-avoidance tax legislation designed to tax disguised employment at a rate similar to employment.” Its goal is to close a loophole in the tax system where employees could use a limited company structure set-up to pay less tax.

The IR35 legislation looks to identify “deemed employees” and make sure they’re taxed properly. However, due to its subjective nature, IR35 can impact workers operating through a limited company structure as well as the UK’s personal service companies.

If you want an example of the challenges posed by IR35, just take a look at Crossrail. 

The well-publicised delays to London’s ambitious engineering project have been caused – at least in part – by the HMRC regulation making it harder to retain skilled contractors. And it isn’t the only public sector project to have suffered.

Now, private sector companies are also beginning to wonder about the implications of having to move their contractors to Pay As You Earn (PAYE). 

Will these companies still be able to attract and retain the best talent? And will they still be able to afford that talent as contractors increase their rates to offset their lost income?

It might be that extended teams based overseas are their best bet of offsetting these concerns and remaining competitive.  

The challenge of IR35

IR35 changes coming into force in April 2020 will make it increasingly difficult for private sector brands to attract the highly-skilled contractors they’ve relied on for years. [Update: UK government has put IR35 tax reforms on hold for a year in the wake of coronavirus crisis].

Why?

Well, the regulation which seeks to stop contractors from paying themselves through dividends (which aren’t subject to National Insurance), will be more difficult for companies to ignore. 

Indeed, Barclays have already jumped the gun and have moved their IT contract roles to PAYE. Other companies are likely to follow suit. 

Similar changes have been enforced in the public sector since 2017. And the figures tell a compelling story of the difficulty in hiring and retaining the best talent.

“By 2018, over half of the public sector hiring managers reported having lost skilled contractors. And nearly three quarters stated that they were facing a challenge to retain them.” CIPD / IPSE study

What’s more, contractors have begun to increase their rates to offset the impact of IR35 on their incomes. The same study claimed that more than four in 10 contractors had upped their rates by 2018. Today it’s likely that twice as many will have done so. 

Might the answer to IR35 lie in software team extension overseas?        

Such is the level of disruption caused by IR35, that many brands are now looking further afield in order to find the talent they need and stay competitive.

After all, in an increasingly interconnected world, it isn’t as if the talent that they’re looking for can only be found in the UK. Particularly for IT expertise – like those Barclays have moved to PAYE – pockets of highly skilled people are available across Europe. 

If you’re looking to compliment your full time IT staff with the flexibility that you’ve grown used to with contractors, it might end up making more sense for you to consider an overseas extended team.

Lots of brands have already found success doing just that. And when you consider that the day rates of developers in IT hubs such as Ukraine are often much more cost-effective than the UK, it’s not hard to see why.

The full impact of the IR35 changes due to roll out in April might not be completely clear until around this time next year. But it seems that those most likely to suffer will be the UK-based contractors themselves.

We source Extended Teams of talented software developers based in Kyiv for a range of client needs. If you’d like to have a chat about how an extended team could help you hit your business objectives, get in touch and request our callback!