This year, employers and the professional recruitment community will have to contend with one of the most significant changes ever to impact the use of contractor workforces. From April, businesses engaging independent workers will become responsible for setting the tax status of these individuals. As part of this reform, the tax liability will also transfer from the contractor to the fee-paying party in the supply chain, which is typically either the company that directly engages the individual, or its recruitment partner.

For HR directors who currently rely on these workers as part of their wider talent mix, it is no surprise that recent reports of high-profile bans on PSC contractors – such as those implemented by HSBC and Barclays – have the potential to be unsettling. However, businesses must not succumb to fearmongering surrounding incoming changes. There is no reason why companies should not continue to engage with genuine contractors – and continue to enjoy the associated benefits that flexible workforces bring.

Despite the widespread negative attention that the extension of off-payroll rules into the private sector have attracted, the new landscape actually offer a prime opportunity for HR teams to audit their existing talent ecosystems. In doing so, they will ensure teams are operating at maximum efficiency, and put in place people processes which are legally sound – but the clock is ticking.

According to research from The Association of Professional Staffing Companies (APSCo), which was undertaken in December 2019, approximately half of businesses in the UK are still unprepared for changes to off-payroll working in the private sector. A survey of the trade body’s membership of professional recruiters revealed that, although 79% of the firms polled believe that most of the businesses they work with are aware of the incoming changes, 51% just said the majority of their clients are actively preparing for the updated legislation.

For businesses which haven’t already started planning for implementation, it’s absolutely vital to do so now. While it’s true that HMRC is undertaking a review into IR35, this is only into how the changes will be implemented, not if the planned changes will go ahead.

The first step is to review existing workforces to determine what percentage of personnel are employed, sole traders and PSC contractors and – crucially – where this talent sits within the business. Depending on internal structures and processes, this may be more difficult than originally anticipated, but the exercise is imperative.

Next, organisations must determine the status of individual PSC contractors identified to find if they are likely to be ‘inside’ or ‘outside’ of IR35. HMRC’s own CEST (Check Employment Status for Tax) tool has received negative feedback in the past, with users criticising a lack of complexity and, as a result, the number of incorrect and inconclusive results it throws up. While CEST may be recommended by HMRC as the go-to tool for IR35 status determinations, it’s important to remember that there are other options available that are just as valid. When determinations are less clear cut, businesses are encouraged to make their own determinations in line with HMRC guidance and keep a record of how and why this decision was reached.

While placing bans on PSC contractor may seem like the easy option, looking at each role on a case-by-case basis will offer HR leaders the opportunity to retain those who are genuinely self-employed while keeping strong audit trails to mitigate against future liability. In fact, HMRC has said that blanket bans will not be reasonable care.

Once existing workforces have been audited, and those who are likely to fall ‘inside’ IR35 pinpointed, the cost implications of either moving these contractors across to PAYE contracts – or replacing those who walk away – should be calculated.

It is worth noting that, while directly replacing a contractor with a permanent member of staff with the same remit may seem like a logical solution, it is not necessarily the best option. At a time when acute talent shortages, shifts in skills demand and the rise of AI and automation are all impacting the world of work, the introduction of IR35 in the private sector offers an ideal chance to review and improve existing workforce plans.

By taking a step back and analysing skills demand within your business based on growth projections, transformation strategy and expected attrition – and then referencing this against talent supply both internally and within the wider workforce – business can effectively determine, and plan to overcome, skills gaps. This may be through contractors – but it could also be through upskilling existing teams, digital transformation strategy or exploring the potential of moving across to Statement of Work contracts.

The benefits to those organisations which get it right are valuable and far reaching.  As well as aiding a reduction in expensive contractors whose skills may not be future fit, robust workforce plans enable HR leaders to identify not only skills gaps, but also skills surplus. Essentially, effective talent planning boosts productivity by ensuring that the right people are in the right place at the right time.

For those roles were non-permanent resource remains necessary, good recruiters will be happy to place genuine contractors outside of IR35, and will work with employers to determine the status of these individuals. The best consultancies will also take a belt and braces approach through insuring against the risk of miscalculation, freeing businesses from any potential liability so that they can continue to benefit from flexible, agile, highly-skilled workforces where they are needed.

If not planned for correctly, the extension of IR35 into the private sector has the potential to restrict the use of contractors and disrupt the UK’s talent ecosystem. However, as we enter a new decade it can also act as a catalyst for HR professionals to reassess how ‘work gets done’ more generally to the benefit of their wider businesses.