How Procurement Can Help Businesses Achieve IR35 Compliance in the UK

The U.K. is set to change its off-payroll working rules (also referred to as “IR35”) for all public sector and medium-and large-sized companies from 6 April this year, with the exception of small businesses.

As a result, businesses would need to set up cross-functional teams with representatives from HR, legal, tax, finance and, notably, procurement to help comply with the new IR35 rules.

GEP believes there is some heavy lifting ahead for the procurement function in companies not yet compliant to the new off-payroll norms. Here are four major tasks that are likely to come procurement’s way to enable a smooth transition to the changed IR35 rules.

1. Identifying Contractors: Contractors who engage with an organization via a personal service company (PSC) typically appear either through recruitment agencies or as suppliers on the company’s ERP or other transactional system. They do not appear as employees on the payroll.

Some contractors may have names that make it obvious they are from PSCs. But for others, it may not be easy to differentiate them from other suppliers by names alone.

Reviewing historical spend will help filter out large suppliers. But this will not yield a definitive list of PSCs on the company’s books.

Some companies with sufficiently rigorous processes for engaging contractors may be able to compile a master list based on the lists of contractors engaged by their various departments.

We suspect that few companies will be able to do this, and even fewer will be confident to rely upon such lists exclusive of other checks and balances.

Also, many companies engage with numerous recruitment agencies or have multiple ERP (or similar) systems, and therefore multiple supplier lists. Some companies have thousands and tens of thousands of suppliers to sift through.

Compiling a complete and accurate list of contractors becomes a time-consuming task and this task is likely to be passed on to procurement professionals familiar with supplier data management and reporting.

2. Segmenting Demand: As contractors are identified, business continuity will require some segmentation. Is the contractor’s role critical or non-critical? Does the contractor have specific experience or an expertise that makes them critical to the business?

A company’s strategy for achieving IR35 compliance may require highly experienced contractors in critical roles who will be managed differently than those in non-critical roles who can be replaced without any harm to the business.

This is demand management. This is another task more aligned with the procurement representatives on the cross-functional team than with, say, those from legal, HR or tax.

Another consideration will be the identification of the business owner of the demand. A company’s accounts payable team can help identify who approves invoices received from a contractor but that person (or team) may not necessarily be the go-to entity for this segmentation activity. We believe procurement is most likely to know, or be able to find out, the business owner.

3. Strategy Execution: Once the contractor base is identified, and the demand segmentation is determined, it will enable companies to determine their overall IR35 strategy.

Some companies are taking a straightforward approach to no longer engage with PSCs and working with recruitment partners to ensure all contractors migrate to the agency contract to ensure IR35 compliance.

For companies where business continuity requires retention of specific contractors, HR is perhaps best placed to develop the policy and manage the process (whether hiring directly or via indirect retention) for those individuals.

For the remainder of contractors who are less indispensable, HR may have resource capacity to execute the company’s strategy unaided (for example, encouraging contractors to continue with them via one or more preferred managed service providers or MSPs or setting them as suppliers on ERP systems).

For many companies, however, we suspect HR will have insufficient capacity and, what is essentially a supplier rationalisation exercise will fall to procurement to complete.

Of course, any aspect of strategy execution involving sourcing MSPs and/or expanding the scope of existing MSPs is the domain of procurement.

4. Reporting and Communication: Companies will have to communicate to their contractors the arrangements for transition to ensure their understanding of what’s required for compliant invoicing on either side of 6 April to ensure business-critical roles remain staffed, and so on.

At least initially, it is procurement that will likely receive the urgent requests from managers with critical positions left unstaffed following the transition to new IR35 rules.

Besides governance-related reporting that will likely fall to procurement (given its substantial involvement in most other areas), we see another critical area -- helping P&L owners and finance quantify and manage the bulk shift from payment of contractors as individual suppliers to payment of some via payroll and others via one or more MSPs.

The more the organizational complexity and the ERP systems, the greater the workload.

What Companies Should Be Doing for IR35

GEP recommends that companies which are yet to complete the execution of their strategies to achieve IR35 compliance work through a resource capacity plan for each area of their cross-functional team, especially for procurement.

Unfortunately, it seems likely that the impact of the COVID-19 pandemic on the workload of companies’ procurement teams will not have eased substantially before 6 April. So IR35 presents a substantial additional burden for already stretched teams.

Partial outsourcing and/or team augmentation can help mitigate the risk to business continuity arising from constraints in procurement resources. This is, of course, most effective when considered early as part of a company’s overall IR35 strategy.