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IR35 reforms: Private sector start date prompts mixed picture of predictions for contracting market

The IR35 tax avoidance reforms take hold in the private sector, prompting a mixed picture of predictions from stakeholders about what the future holds for contractors in the UK

The Association of Independent Professionals and the Self-Employed (IPSE) claims the government’s decision to press ahead with the private sector roll-out of the IR35 tax avoidance reforms risks “undermining the UK’s contractors at the worst possible time”.

The reforms are designed to clamp down on tax avoidance and disguised employment by limited company contractors that essentially work as employees for the private sector firms they are hired by.

The reforms, which come into force in the private sector today (6 April 2021), see contractors cede control to the medium-to-large organisations that hire them for determining if the work they do and how it is performed means they should be taxed in the same way as salaried employees (inside IR35) or off-payroll workers (outside IR35).

Previously, it was down to contractors to decide if their engagements were inside IR35 or outside IR35, but HM Revenue & Customs (HMRC) are of the view that this arrangement was subject to misuse by contractors who deliberately sought to misclassify themselves as working off-payroll to minimise their employment tax liabilities.

This is because an inside IR35 designation means the contractor in question is liable to make pay-as-you-earn (PAYE) tax and National Insurance Contributions. Meanwhile, it is possible for a limited company contractor working outside IR35 to pay themselves a relatively small taxable salary and make up the rest of their income in non-taxable dividends.  

A similar set of changes were introduced in the public sector in April 2017, resulting in blanket bans on the use of limited company contractors in some government departments, or blanket assessments whereby all of their freelancers were declared as working inside IR35.

According to an IPSE poll of its members, the private sector version of the reforms has resulted in similar behaviours playing out, with 24% claiming their clients were planning to blanket-assess all their contractors as inside IR35, while a fifth said their clients will only engage contractors working through umbrella companies from 6 April 2021 onwards. A further 8% reported that their clients had issued guidance stating they intended to stop hiring contractors at all.

Career reassessment

The onset of these scenarios has prompted many contractors to reassess their freelancing careers, with 50% of those polled indicating that they plan to quit contracting in the UK unless they can source jobs that are out of scope of the IR35 regulations.

A quarter (24%) said they plan to seek work overseas, but others indicated a preference for leaving contracting altogether. On this point, 12% said they will quit working as a contractor, while 17% said they will be seeking permanent employment, and 11% said they plan to retire within the next year.

Given the working prospects of many contractors have taken a battering over the last 12 months, due to the onset of the Covid-19 coronavirus pandemic and Brexit, IPSE director of policy Andy Chamberlain said the reforms are coming in at the worst possible time.

“The changes to IR35 would do serious harm to the self-employed sector at the best of times, but now they are adding drastic, unnecessary damage to the financial carnage of the pandemic – undermining the UK’s contractors at the worst possible time,” he said.

The biggest problem posed by the reforms are their complexity, he added, and there remains “serious doubts” over the accuracy of the online tool HMRC provides end-clients with to help them decide how their contractors should be taxed.

“The changes to IR35 are shifting this complexity from contractors themselves onto their clients,” said Chamberlain. “The result is clear: chaos. Many clients are pushing all their contractors inside IR35 – against the rules of the legislation. Many more are only engaging contractors through umbrella companies, while others are scrapping their contractor workforces altogether – just when, as the economy opens up, they will need them most.

“IPSE have campaigned long and hard against these disastrous changes, securing delays and important concessions, but the government is determined to bring them in. We continue to urge government to rethink the changes.”

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With the reforms now in play, IPSE will be changing the focus of its campaigning efforts against IR35, said Chamberlain.

“Our… key concern is pushing government for a root and branch review and reform of self-employed taxation in the UK. IR35 is not an isolated problem: it is a marker of a tax system that was not built with the self-employed in mind. It is this that has to change – to make IR35 redundant and finally make taxation fairer and simpler for the self-employed,” he added.

Meanwhile, Seb Maley, CEO of contracting insurance provider Qdos, said – while the reforms will pose challenges to private sector firms and contractors alike, there are reasons for positivity.

“In recent months the tide has turned, with thousands of businesses now aware of the fact that IR35 reform is manageable. These firms, who have prioritised compliant IR35 status decisions and will continue engaging contractors, are set to gain a huge advantage over those who have banned contractors because of the changes - a short-sighted and totally needless decision,” he said.

“Despite IR35 reform and the problems the changes create, I am optimistic about the future of contracting. The economic climate, the changing makeup of the workforce and the growing demand for flexible, skilled and cost-efficient workers suggest contracting is here to stay in spite of these changes.”

Dave Chaplin, CEO of contracting authority ContractorCalculator, is similarly optimistic that once the dust settles, limited company contractors will find their skills and expertise highly sought after by private sector hirers again.

“Once some begin to test the water by engaging limited company contractors, others will undoubtedly follow, not least because the flexible workforce is the bedrock of UK plc and the UK economy,” said Chaplin. “Contractors provide vital skills on an ‘as needs’ basis and once businesses overcome any overly heightened fears they have, they will turn to limited company contractors again as they recognise the practical and commercial benefits they bring.”

Proceeding with caution

He also warned contractors who are working for firms who have yet to decide whether their role will be inside or outside IR35 from today to be cautious of continuing with their current engagements.

“I would urge contractors to hold their nerve and for those hirers who are not prepared, it may be prudent to terminate or pause any existing contracts with contingent workers immediately and then start assessing them before they continue their work,” he said.

“Contractors should still be able to secure ‘outside IR35’ engagements and firms should have nothing to fear provided they follow the highest standards of IR35 compliance.”

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