IR35: The End of Gig Economy Lawyers in the UK
By Axiom Law
In the UK, an updated tax law, IR35, will change the nature of freelance work and have clear repercussions for self-employed lawyers and their clients. Changes to IR35 go live in April 2021, and brings several disadvantages for companies working with freelance contractors. These include the possibility of tax liability, or the significant burden of carefully auditing any non-permanent workforce. These changes threaten to reduce the attractiveness of a self-employed "top-up" workforce for legal functions – potentially leading to the eventual demise of the "gig economy" for lawyers.
As the world's leading employer of flexible legal talent, Axiom is fast becoming the destination of choice for self-employed lawyers looking for a new path, and for clients who need to minimise the headache and cost of dealing with IR35. As IR35 approaches, here’s some of the important information you need to know.
What is IR35?
IR35 is a catch-all term, referring to a set of tax legislation that was originally announced by HMRC under a press release labelled “IR35.” It’s designed to reduce tax avoidance by contractors believed to be "disguised employees" – that is, working in a similar way to full-time employees, but invoicing for their services via limited companies in order to reduce tax liabilities.
IR35 has been in force in the public sector since April 2000, and is set to come into force in the private sector in April 2021. It will require businesses to identify affected contractors, determine whether they are in fact "disguised employees," and take the appropriate steps if that is the case. This includes, ultimately, operating Pay as You Earn (PAYE) taxes and national insurance contributions. Currently the burden of determining tax status falls on the individual contractors themselves.
Why the demise of the gig economy matters to legal functions
IR35 is connected to a fundamental question: Is a pure gig economy – that is, self-employed lawyers – the most intelligent solution for legal functions facing these challenges in the first place?
A market of self-employed talent can solve problems neatly in the near term, and is crucial in terms of enabling businesses to access quality talent in niche areas of specialization during periods of high demand. After all, in uncertain times, agility and cost control are the order of the day. However, relying on self-employed talent often causes businesses to sacrifice a proper return on investment in an individual on the altar of this short-term expediency. It can also result in the loss of institutional knowledge when the lawyer’s contract ends. As a result, it can be unprofitable for both parties in the long-term.
Why experts predict self-employed lawyers are more likely to fall under IR35 than other professionals
IR35 isn’t just a legal issue, and many businesses have large numbers of self-employed contractors contributing to functions like IT, HR, and operations. However, the nature of how legal work is conducted means it may be more likely that a self-employed lawyer will fall under IR35.
When determining whether or not a contractor is a "disguised employee,” businesses are likely to have to consider factors such as the degree of control over how work is completed, a contractor's ability to substitute others to do the work, and whether or not the contractor is truly free to walk away when the contract comes to an end.
When it comes to control over how work is performed, legal work usually needs to be monitored and supervised; and the business will most often have strong input into working patterns and the way work is performed. When it comes to the ability to substitute, legal work needs to be carefully matched to the right lawyer in terms of technical skill set, experience, and industry expertise. That is not straightforward, and is only achievable through access to specialist teams and a broad bench of lawyers. Contractors may find it difficult to demonstrate the ability to do this.
Finally, of course contractors are free, to some extent, to walk away from a fixed-term contract. However, in practice, most of these contracts extend beyond their original term, as legal work follows the demands of the business, which are typically outside of the contractor's control. Each contractor will need to be assessed on their own merits, which is a large undertaking for the businesses in which they work; but there are grounds to assume that most will fall under IR35.
Questions leaders of legal functions need to be asking now about IR35
Those responsible for managing internal and external legal spend need to start preparing for IR35 now. The following questions can help guide your preparation and response:
- How many self-employed lawyers currently support your business?
- Will you still need that flexible support after April 2021?
- Have you budgeted for any increase in the cost of procuring these services – for example, national insurance contributions?
- Would it make sense to find an employed lawyer who can transition into this work?
- Will you need to pass any contractors to a firm like Axiom, which can quickly hire quality talent, subject to the scrutiny of our usual hiring process?
Those who are in planning mode, or who are looking to bring in flexible resources in the coming months, should consider the following:
- If bringing in a self-employed lawyer – for example, via a third-party agency or network – have you budgeted for any increase in cost after April 2021?
- Would an employed lawyer committed to resolving the underlying business problem represent better overall value for money?
- What are the costs in terms of time, money, and business risk of finding yourself understaffed in April 2021?
For businesses looking to comply with IR35, but who still need both flexibility and to harness the value of employed legal talent, Axiom offers a unique solution. The vast majority of our lawyers are Axiom employees who benefit from the stability of employment while receiving ongoing training, professional development opportunities, and the chance to develop their careers on their own terms. They are poised to add long-term value to your business and to help you meet your goals. To find out how we can help you reimagine your legal department and prepare for IR35, get in touch.
Lawyer Naomi Gaffney has deepened her experience at Axiom where she practices financial law.
How Axiom can help you maintain an agile legal department and in-house career after changes to IR35 are implemented in April 2021.