The new approach to enforcing IR35 legislation comes into being from April 2020 and, unless banks navigate the coming months effectively, has the potential to derail the operational continuity of the banking sector.
IR35 is a piece of legislation intended to reduce tax avoidance by contractors who HMRC believe to be disguised employees. What is causing the headache is that, from April 2020, it will be the company hiring contractors who will have to decide on the contractor’s IR35 status. This moves the risk of getting it wrong firmly to the door of the hiring bank. Previously, it was the contractor deciding on their own IR35 status and having to deal with the consequences (paying back tax, penalties, and interest) for incorrect reporting.
For banks, this came at a very inconvenient time many have embarked on large-scale digital transformations worth of billions. Managing transformations within a strongly regulated industry requires specialist skills and technical knowledge at scale. Banks have, in the past, relied on the contractor network to progress at speed – now this becomes a legacy challenge when it comes to performing IR35 assessments. The scope for tax risks associated with inaccurate reporting is significant – and this may well fall outside banks’ risk appetite.
There are concerns over business and operational continuities too. The mandate to upgrade digital infrastructure and optimise operating models takes years to fulfil. This “captive” reality gives sharp teeth to a seemingly innocuous change to IR35 rules.
Loss of talent and knowledge capital: Financial services already face a challenge from other sectors of the UK in attracting and retaining IT, digital and cyber professionals. The demand for such professionals has far outstripped market supply. There is a risk that banks will lose access to vital skills, talent and knowledge that will impact on how achievable digital transformation programmes are.
Increased reputational risk: the reputational risk implications of IR35 can often be underestimated. Whether it is directly related with inaccurate reporting of contractors’ tax status, or indirectly as skill shortages contribute to programme delays and service outages – these are emerging risks where bank leadership should identify and demand assurance over.
A number of banks have already made public their decision to cease “Limited Company” contractors. HSBC, for example, stated that they will no longer take contractors from September 2019, while the same is the case for Morgan Stanley from October.
Based on our work across the industry, while IR35 has left many scratching heads about the best way to respond, leading banks have started working with third-party companies to secure the supply of equivalent services and retain key talent on a sustainable basis, while minimising risks.
With the April 2020 deadline fast approaching, banks need to act now to avoid a cliff-edge scenario in talent access and change delivery momentum. This should start with identifying the most critical and specialist capabilities (where they currently have a gap in-house) and securing the continuity of such services. Change programme leaders need to be empowered to guide and make decisions that will impact on the time and cost performance of existing programmes and, ultimately, the longer-term performance of banks overall. Going forward, instead of seeing IR35 as an inconvenience, banks should treat this as a catalyst to review skill needs and to re-imagine talent model of the future.
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