One significant development recently in the UK freelance world, is the decline of the outside IR35 contract. For decades, IR35 has loomed over the contracting and freelance world, dating back to my very first contract.
The conversation around IR35 has been a long standing tug of war, with court battles, various solutions, and attempts to circumvent it. However, this year, things really did seem to change.
The Inland Revenue shifted its focus. Instead of targeting contractors and freelancers directly, it turned its attention to the finance departments of major corporations.
This strategic change caused a ripple effect. Many clients, wary of the potential liability associated with contractors, simply stopped engaging them.
This purging of contractors aligned with the Inland Revenue’s stance that contracting should be a short-term solution. And, to some extent, it’s hard to argue with that perspective.
The problem, however, is with implementing that in a practical way
Large corporate projects often span multiple years and can grow and shrink according to issues along the way and require specialised expertise, that you would normally solve by hiring freelance contractors or consultants.
The new limitations make long-term, specialised projects harder to manage. However, these restrictions apply only to contractors, not vendors. This distinction creates a significant disparity in how companies operate; basically, big companies have it easier, and from the inside it seems like the Inland Revenue favours them.
The Vendor Transition
Our company, LDC Via, is a small business founded by experienced contractors over 15 years ago. Our goal has always been to collaborate and build something beyond what we could do as individuals, a consultancy focused on delivering specialist products and value.
Now we formed because we were a like group of people that wanted to work together rather than the desire to be a “vendor” but that is what we have in fact become; we’ve had to navigate the complex transition from contractor(s) to a genuine vendor.
This process involves intense paperwork and administrative hurdles, as large corporate clients are structured to deal with single person contractors or huge vendors but not much in between.
Last year, this issue came to a head. We received a mandate enforcing a time limit on the period contractors could work at a corporation. All the freelancers working outside major vendors faced the same challenge.
However, we had acted internally as a genuine vendor for our entire existence, and we only used contracts verses vendor statements of work as they were simpler and easier for the client; a contract can be agreed upon and signed in under 48 hours, whereas a statement of work can take up to 3 months.
So ultimately, the move for us from contracting for a client to becoming a full vendor was just a paperwork change rather than a change in work style, something a lot of freelancers dont have the luxury of doing,
but for those thinking of making the same change and have a group of trusted colleagues that they can form a genuine company with. Here are the key challenges of being a Vendor:
Slower Payments
Vendors often face significant payment delays. While contractors and agencies are usually paid on a regular schedule, vendors can wait months or even a year to receive payment. This creates cash flow nightmares, particularly for small vendors.
Administrative Overhead
Vendors deal with more complex invoicing processes, requiring back and forth negotiations with procurement and accounts payable. This extra layer of admin work often necessitates hiring dedicated staff just to manage paperwork.
Delivery Based Payment
Vendors operate under stricter, goal oriented deliverables. Even if all deliverables are met, proving fulfilment can be challenging due to internal inefficiencies within the client organisation.
Vendors sometimes need to demonstrate internal incompetence in a client just to secure payment, a frustrating and counterproductive system that does nothing to foster a good working relationship.
High Costs
The added paperwork and administrative burden directly contribute to higher vendor costs. This “make work” system is inefficient but unavoidable in large corporations.
Working “At Risk”
As statments of work take so long to setup and get agreed, clients often ask you to work “at risk,” which is another way of saying “can you start work without any formal contract or guarantee that you will be paid.” Obviously, the statment of work will be backdated.
so you should be paid for your work in the end, its still a nerve racking business each time. This risk side is one of the core differences between vendors and contractors.
Why the Shift?
The Inland Revenue’s preference to vendors rather than contractors makes sense when considering regular payments.
Contractors, with their predictable monthly invoices, resemble employees, making them easy targets for scrutiny. On the other hand, vendors, plagued by irregular payments and chaotic processes, appear less like employees and more like separate entities, albeit at the cost of efficiency.
Conclusion
For contractors considering the leap to vendor status, it’s a challenging path. While we’ve successfully operated as a vendor for over a decade, the transition comes with significant paperwork, slower payments, and more admin.
The higher costs associated with vendors stem directly from these inefficiencies.
Ultimately, improving internal processes could benefit everyone involved. Until then, the distinction between contractors and vendors will continue to shape the way projects are managed in large corporations as well as how they are perceived by the Inland Revenue.
