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Can UK Tech Start-Ups Thrive With The IR35 Tax Reforms?

Contributor Graham Smith, Head of Marketing at Curo Talent.

Every hour, one new technology start-up is established in the UK. These businesses will no doubt play huge role in boosting Britain’s digital sector, but with IT35 reforms set for April 2020, will this deny them access to the talent they need?

Tech start-ups don’t repeat technologies that already exist; they are the entrepreneurs that develop new ways of doing things that disrupt the market, improve efficiency and make our lives more enjoyable. To do this, they need the very best IT talent and contractors often provide the expertise.

IT contractors frequently move from one project to another — whether that’s for a large organization or a start-up. The skills that come from working across different sectors and discovering best practices are the sort of skills that will make the UK a leader. 

Contractors are also very aware of the technologies that will be big in the future and are generally first to obtain those skills. They must be ahead of the game or risk not being employed.

They also have the advantage of being a specialist and improve their skills by repeating a deployment several times across many different companies. Contractors tend to be fast. UK tech start-ups benefit from a pool of freelance tech talent that is fast, has leading-edge skills with a full breadth of ‘real world’ experience.

Unfortunately, the IR35 tax reforms announced by Philip Hammond in the Autumn 2018 budget could mean the pool of freelance talent will shrink, plus start-ups may avoid using these experts.

Philip Hammond described the new IR35 legislation as designed for fairness – leveling the playing field for both public and private sector work. However, it complicates self-employed work for IT contractors and places the burden of proving IR35 compliance on the employer.

IT contractors outside of IR35 receive a relatively modest tax advantage compared to their employed counterparts.  Arguably contractors sacrifice employment rights and security paid holidays and sick leave and are required to tackle their own insurances, professional fees, provide their own pension… all with no guarantee of income.

Some contractors may decide that the disadvantages now outweigh the advantages and move to permanent employment.

UK start-up companies may also decide the complexity and burden of proving the contractor is outside of IR35 is too much of an administrative burden. Start-ups tend to begin small and lean, but operating in a fast-paced tech environment means they can quickly grow to the 50 staff where IR35 kicks-in. Checking, proving and recording that a contractor meets the new IR35 criteria may be a process they cannot adopt because they don’t have the resources (plus the fear that if they get it wrong, they may be fined by HMRC).

Contracting in IT and computing should be encouraged, not discouraged by a complex, burdensome and old-fashioned tax system. IR35 was first introduced in 1999, and too much has changed in the world of work for us to expect it to now be fit for purpose.

Rising numbers of tech start-ups in the country require the tax system to support them, rather than hinder their hunt for IT talent. If IR35 reduces the talent pool, these start-ups will have reduced the ability to develop, implement and manage ground-breaking digital technologies. 

With new technology start-ups being established in Britain on an hourly basis, the Government needs to question whether the IR35 reforms are suitable for today’s tech landscape. 

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