IR35 private sector reforms: IPSE warns of UK contracting talent exodus unless start date delayed

The extension of the IR35 tax-avoidance reforms to the private sector from 6 April 2021 could lead to a shortage of contracting talent in the UK, suggests research from the Association of Independent Professionals and the Self-Employed (IPSE).

According to an IPSE poll of 1,645 contractors, half of those questioned said they plan to stop contracting in the UK once the reforms come into force unless they can find assignments that are out of scope of the reworked rules.

When IPSE carried out a similar poll last year, before the start date for the reforms was delayed for 12 months because of the Covid-19 pandemic, 32% of contractors said they planned to stop contracting in the UK.

The uptick in the percentage of contractors looking to call it quits is partially attributed by IPSE to the fact that the economic fallout from the pandemic has prompted freelancers to re-evaluate their options.

Of those planning to exit the UK contracting market, 24% said they are plotting to find work overseas, while 17% said they intend to seek permanent sources of employment instead.

Others are planning to down tools and stop working altogether (12%), and 11% said they aim to retire within the next 12 months anyway.

Andy Chamberlain, director of policy at IPSE, said it is “not surprising” to hear that so many contractors are considering leaving the market by either closing their business or plotting a move overseas in the current climate.

But with the economy still feeling the full dampening effects of the pandemic, companies’ ability to bounce back might be hampered by a lack of contractors post-April 2021.

“In recessions more than any other time, the UK needs its freelancers,” said Chamberlain. “Their innovation and dynamism have historically always been the kick-starter to get the economy out of downturns.”

For this reason, IPSE is repeating its call for the government to consider delaying the roll-out of the reforms again.

“Pushing ahead with the IR35 changes now would undermine this vital [freelancing] sector just when the UK economy needs it most,” he added. “Therefore, for freelancers, the businesses that engage them and for the UK economy, we are urging the government to delay and rethink the changes to IR35.”

Concerns have been raised repeatedly about the onset of the reforms, which are set to shift responsibility for determining how contractors will be taxed onto the medium to large private-sector firms that engage them.

Currently, it is down to contractors to determine whether the work they do and how it is performed means they should be taxed in the same way as permanent employees (inside IR35) or as off-payroll workers (outside IR35).

HM Revenue & Customs (HMRC) has designed this shift in responsibility to clamp down on contractors that seek to deliberately misclassify themselves as working outside IR35 to minimise their employment tax liabilities.

However, making end-clients responsible for determining how contractors should be taxed is an additional administrative burden that a number of firms have indicated they are unwilling to shoulder by banning the hiring of limited company and personal service company (PSC) contractors from their flexible labour supply chains.

Others have also reportedly ignored HMRC’s advice to use “reasonable care” when determining how the contractors they engage should be taxed by carrying out blanket assessments whereby all their freelancers are deemed to be working inside IR35.

The IPSE research, however, suggests many firms are still hammering out their IR35 compliance strategies, with 24% of contractors claiming their clients are yet to announce details of what their plans are, despite the start date being less than a month away.

The same percentage of contractors said their clients have responded by blanket-assessing all their contractors as working inside IR35, while 21% have introduced PSC bans that mean they will only engage contractors working through umbrella companies. A further 8% said their clients plan to cease engaging contractors altogether.

“The pandemic has done disproportionate financial damage to the self-employed sector – after this, it simply cannot take the added hit of the changes to IR35,” said Chamberlain. “This research shows that not only are a large proportion of businesses not ready for the changes, but many others are responding by either ceasing to engage contractors altogether or forcing them inside IR35 or into umbrella companies – both of which will slash their income.

“It is not surprising, therefore, that so many freelancers are reconsidering their prospects in the UK workforce – either planning to close their businesses or take them overseas. In recessions more than any other time, the UK needs its freelancers – their innovation and dynamism have historically always been the kick-starter to get the economy out of downturns.

“Pushing ahead with the IR35 changes now would undermine this vital sector just when the UK economy needs it most. Therefore, for freelancers, the businesses that engage them and for the UK economy, we are urging the government to delay and rethink the changes to IR35.”

Dave Chaplin, CEO of contracting authority ContractorCalculator, said the results of the poll tally with emerging anecdotal reports of how firms and contractors are responding to the reforms.  

“The behavioural effects of the so-called reforms are pushing work offshore, with firms hiring overseas workers rather than UK contractors to circumvent the rules, and thousands of the UK self-employed are quitting contracting for lower-paid work,” he said.

“Some firms have resorted to blanket banning limited company contractors and will see a considerable rise in their costs. Others will see contractors walking out and projects damaged and delayed.”

As previously reported by Computer Weekly, there are also growing concerns about the number of firms introducing policies that state contractors can only continue to work for them if they are willing to do so via umbrella companies.  

“We will also see a proliferation of unregulated third-party payroll schemes emerging, and many contractors will be unwittingly duped into non-compliant schemes, resulting in a second incarnation of the Loan Charge,” said Chaplin.