Navigating IR35 in the Engineering Sector

Matt Tyler, IR35 consultancy manager at Kingsbridge, sheds light on the evolving attitudes towards off-payroll reform in the engineering sector and provides practical guidance for navigating the complexities

THE IMPACT of IR35 on the UK’s independent workforce, particularly in industries like IT and engineering, cannot be overstated. IR35, introduced by HMRC in 2000, is a set of rules that affect income tax and National Insurance Contributions (NICs) if you provide services for a client through an intermediary, like a limited company. Introduced to combat tax evasion through disguised employment, IR35 assesses whether individuals should be taxed as employees or self-employed entities. Its premise is simple: if your working arrangement resembles employment, you should be taxed as such.

The assessment to find out if a contractor is “truly” self-employed or provides their services more akin to a permanent employee, hinges on factors like personal service, control, and mutual obligation. In recent years, responsibility for this assessment has shifted from contractors to end clients, stirring up some knee-jerk reluctance in engaging with personal service company contractors (or PSCs). Here at Kingsbridge, we’ve found that naturally, contractors prefer outside IR35 positions because they typically offer greater flexibility and autonomy, which are essential in a dynamic field like engineering.

The transition of IR35 assessment responsibility from individual contractors to end clients, especially after the 2017 and 2021 reforms, has substantially altered the dynamics of contractual work in engineering. It necessitates a nuanced understanding of the legislation to ensure both compliance and effective use of human resources.

The shifting perception of IR35

In recent years, we have observed a gradual but significant shift in the engineering sector’s approach to IR35. Initially met with hesitation and conservatism, the mindset is gradually transitioning towards a more balanced and informed view. Our 2023 white paper, based on feedback from nearly 2,000 businesses, reflects this positive trend, indicative of an adapting industry.
End clients are increasingly recognising the value of engaging with contractors outside the IR35 framework. This evolution in understanding is crucial, as it allows for more flexible and mutually beneficial working arrangements. It’s a trend that not only reflects a deeper understanding of IR35’s intricacies but also a willingness to adapt to the evolving regulatory landscape.

Engineering roles and IR35 balance

A critical aspect in the engineering sector is the delicate balance of inside and outside IR35 roles.

Our extensive research indicates that nearly half of engineering roles are currently classified as inside IR35 (48% according to our survey responses). This scenario, while reflective of a cautious initial response to IR35 reforms, also highlights the pressing need for a broader understanding and more nuanced application of the rules.

A decrease in this percentage over time will signify a growing understanding and acceptance of IR35, which we hope to see in future research. A reduction in inside IR35 classifications would signal a maturing market, one where the intricacies of IR35 are better navigated, and the value of flexible contracting is more widely recognised and utilised.