Despite congratulatory headlines of record investment into London startups, those involved in the nurture and scaleup of tech ventures share the view that the UK is becoming increasingly adept at shooting itself in the foot.
While some analysis might question the impact of Brexit, there is no doubt that it continues to mire founders, investors and much-needed talent in uncertainty. A close second and new for 2020 is the spectre of IR35 – an additional albatross around the necks of UK startups that will undoubtedly hit their ability to rapidly innovate and scale, hard.
Announced in 2019 and coming into force for a large section of UK private companies in April 2020, IR35 is a regulation designed to tackle tax avoidance by contractors. In short, it will now be up to the organisation to prove that the freelancers they engage are not, in reality, performing the role of an employee and ‘dressing up’ as a contractor in order to gain tax benefits.
These reforms have been received so poorly by business leaders and MPs alike that the government has just announced a review into the forthcoming implementation. This comes on the heels of big names such as GSK, Lloyds and Barclays putting a stop to contractor hires due to the burden IR35 will place on them.
Businesses scrap contractors
Ahead of April UK startups are also readying themselves to deal with this regulatory noose that will see as many as 20% of UK businesses axing contractors completely to ensure they are compliant ahead of the changes. The same report claims 83% of businesses believe IR35 will negatively affect their industry, especially where significant numbers of IT and tech contractors are required – the backbone of our tech-driven, startup sector.
Who to hire and when is a common problem for startups. The choice between employee or contractor is a massive issue for startups who simply can’t afford to invest in a long-term, holistic mix of talent and so hire for urgent need, not long-term strategy. What this often means for tech-based startups is that they plough hard-won initial investment into hiring developers to perfect their platforms. They focus on the tech, often over-engineering early iterations leaving the equally important needs of branding, marketing and scale-up strategy to the very last minute.
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This essentially means that they work twice as hard to find those first vital customers that make ongoing business viable! Affording the mix of talent they need is already difficult enough without adding additional burden.
What do contractors think of IR35?
Contractors themselves are understandably upset about the changes, stating in a recent survey that they felt “under-appreciated by the government”, with 91% concerned that they were not considered as a tool for economic growth. The fewer opportunities there are to hire talented contractors, the more often these mistakes will be made. Venture enablers such as Equals Collective, which I co-founded to help startups access the talent and expertise they need on tap, can help plug this gap. However, the government’s startup-support issue is bigger than just talent – it’s the competition from sunnier climes too.
While grappling with wider regulatory burdens (not least resulting in Uber recently losing its London license), UK startups are wary of the administrative burden of IR35, and the potential fines HMRC is readying itself to impose. Even the smallest, leanest startup sets its sight on growth, and once it picks up pace it can very quickly reach the threshold that triggers the UK regulation.
Many commentators are seriously concerned that IR35 will see the UK contractor pool dry up, making it hard to find skilled staff to project manage scaleup and innovation programmes. All this is taking place in the context of a European contractor market that is expanding and increasingly more welcoming to the freelancer economy.
The danger of deterring tech talent
Freelancers are the fastest-growing segment of the EU labour market, now totalling about 11 million. Most of these freelancers categorise themselves as working in marketing and communication and IT/Tech – exactly the type of expertise that startups are in desperate need of.
Earlier this year, Valuer rated the most attractive cities for startups across the globe; Berlin, Tel Aviv, Helsinki and Stockholm took the top four spots. Attractive to talent, with low living costs, high levels of government support for startups and ease of movement – these all pipped London, which fell out of the top five behind Bengaluru, India.
It’s likely that the pressure on talent will see startups increasingly eyeing up European hubs. As the UK puts the squeeze on the ability to easily access freelance talent, could startups better find the talent they need in sunnier European climes? And for the talent itself, in a candidate’s market where skills are much sought-after, will this regulation encourage an outflux of ambitious contractors across the water?
Whatever your views on Brexit, when combined with IR35 the messages the UK is sending do not resound with support for new ways of working that include agile and borderless innovation. As this latest IR35 review gets underway, I’d urge any business with plans to scale in the UK to make its voice heard. We might not be able to scrap IR35 but together we can send a message that agile talent must be welcome in the UK.
So, the newly announced review into IR35 is great news for scaling businesses and contractors alike. I’d advise all UK businesses to make their voice heard so that the UK government truly understands the impact of what they’re looking to implement.