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IR35 reforms: Qdos research suggests room for improvement

The IR35 reforms came into force in April 2021, but research from contracting authority Qdos suggests some end-client organisation's compliance strategies require urgent improvement

IT contractors should see an uptick in the number of roles being advertised as outside IR35 over the coming months, predicts contracting authority Qdos.

This is on the back of a poll the company recently conducted, featuring input from 1,846 UK contractors, about how their clients have responded to the onset of the IR35 reforms, which came into force in the private sector in April 2021.

Since this date, medium-to-large private sector organisations have been responsible for determining how the contractors they engage with should be taxed, based on the work they do and how it is performed.

Previously, it was down to contractors to self-declare whether or not the work they do means they should be taxed in the same way as an employee (inside IR35) or as an off-payroll worker (outside IR35).

The changes were introduced as part of an ongoing disguised employment clampdown by HM Revenue & Customs (HMRC), who claim some contractors have deliberately sought to misclassify their working engagements as outside IR35 to minimise their employment tax liabilities.

Similar reforms were rolled out to the public sector in April 2017, and in both instances the reforms resulted in end-user organisations introducing employment policies that banned the hiring of limited company contractors, or insisting that all contractor roles were inside IR35.

According to the insights gleaned by Qdos, two-thirds (65%) of the contractors it quizzed said their clients had declared their working arrangements as being inside IR35, while the remaining 35% said they were classified as working outside IR35.

Read more about the IR35 reforms

Once the reforms have had a chance to bed in, Qdos predicts that many more contractors will find themselves working outside IR35.

“I’m not surprised that there’s clearly still work to be done and contractors aren’t convinced that reform is manageable. But even so, whichever way you look at it, contracting isn’t dead – nor will IR35 reform spell the end to working in this way,” said Qdos CEO Seb Maley.

“And I’ve no doubt that as the dust settles, more businesses will get to grips with the changes, reverse needless contractor bans and compliantly engage contractors outside IR35.”

Newfound responsibilities

The research also hints at a degree of discontent among contractors about how their clients have handled their newfound responsibilities since the reforms kicked in, with 50% of those questioned stating that they may seek to challenge the IR35 status determination handed to them by their clients.

As per HMRC’s IR35 guidance, organisations in-scope of the IR35 reforms must use “reasonable care” when determining the tax status of the contractors they engage by individually assessing their working arrangements on a case-by-case basis.

The outcome of these assessments must also be confirmed in writing to the contractor in the form of a Status Determination Statement (SDS), which must also outline the reasons why their engagement has been classified as either inside or outside of IR35.

However, the Qdos research suggests many firms are falling short of meeting this requirement, with 44% of respondents saying they are unsure whether they have received an SDS from their client or not.

These findings suggest there is more work yet for businesses to do to ensure they are complying with the IR35 reforms, added Maley.

“Reform has landed, but that doesn’t mean it’s ‘job done’ for businesses,” he said. “Half of contractors might challenge their IR35 assessment, while a similar number aren’t sure if their client has provided them with a Status Determination Statement despite it being a legal requirement.

“Firms need to remember that preparing for IR35 reform was phase one. Phase two – which we have now entered – is ensuring compliance going forward.”

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