IR35: The opportunity for better accounting of human capital
For organisations using large volumes of contractors, complying with the new IR35 rules will be a huge amount of work. However, it also offers an opportune time to evaluate human capital disclosure issues in current accounting systems, writes Ken Charman.
The private sector is expected to be commercially resistant to HMRC’s IR35 reforms, but with Barclays and Lloyds recently deciding to bring all contractors onto the payroll ahead of the April 2020 deadline, these two big banks have made their stance known at a time of increasing pressure from markets and regulators.
Whilst many have questioned their blanket approach and concerns that the industry will soon face a talent drain as a result, for organisations buying in contractor or gig labour through the purchase ledger, the change in rules will bring much-needed transparency, especially for businesses unable to understand the full picture of their labour productivity or able to report on the risk of continuity.
Reporting people costs is a cutting-edge necessity. Organisations need to make sure their contingent labourers are being looked after, and at the same time, they must understand the full human capital cost that goes into producing value for their organisation.
When it comes to external contractors or consultants, organisations often exclude these costs from the employee payroll. Not only is this a problem for organisations to accurately report on their total people costs, but it is a problem when reporting headcount. Organisations are coming under increasing scrutiny for non-disclosure of headcount both between full-time and part-time employees and contractors.
In overlooking the total data pertinent to contingent workers, organisations fail to understand labour productivity and end up with a skewed analysis that only takes into account full-time employees. Deloitte found last year that only 42% of organisations were primarily made up of salaried employees.
Preparing for IR35
For organisations with lots of contractors, complying with the new IR35 rules amounts to a huge amount of work. However, it also offers an opportune time to evaluate human capital disclosure issues in current accounting systems. Especially where human-related expenditures are treated as expenses and deducted from revenues – this is not fit for today’s organisations.
Today’s systems used for acquisition of contingent labour and its management lack consistency, meaning that they fail to deliver any useful insights into productivity and often mislead decision-makers into inappropriate judgments. Often fragmented and owned by separate business functions, these systems are yet to be consolidated to meet the needs of the new workforce. And without a consolidated system, businesses cannot maximise their productivity, or make the necessary effective investment in their workers.
The rumoured “talent drain” expected to be caused by the IR35 reforms is a risk that businesses can avoid by better understanding the skill sets and requirements of their staff and contractors and taking steps to mitigate this through workforce retraining and other initiatives.
But whilst the costs of training employees is still shown as an expense in the P&L account, there is little evidence that these investments pay off, especially on productivity. Organisations need to be able to measure the impact of their investments in training and other people initiatives.
“Does this allow us to do more with less? Have we increased productivity?” are questions often asked in workplaces across the UK. This can only be measured accurately when you have a complete view of people costs and headcount.
The regulatory landscape is changing, and the lines between contingent workers and employees are becoming increasingly blurred. This cannot be more clearly illustrated than with the recent troubles of Uber in the UK, whose drivers – traditionally thought to be self-employed – were, in fact, employees of the company and Uber now has statutory obligations to give drivers holiday and sick pay (and thus, they are entitled to a minimum wage and paid leave). Until this happened, this is a cost that wasn’t broken down and could be a way of hiding a very bad gender pay gap, underrepresented minorities and more – regulators are catching up with that.
Businesses have a duty to themselves, the regulators, and to the wider market, to adapt their practices. First and foremost, this must be achieved by bringing a new layer of transparency into the management of their contingent workforce. Failure to do so means that they cannot properly invest in their workers (upskilling/reskilling is one of the most effective ways to mitigate talent drain), and creates friction when it comes to auditing, regulatory relations and market analysis.