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The government’s decision to extend the IR35 reforms to the private sector in April 2021 had a significant and damaging impact on contractors and the firms they work for, according to a study by compliance consultancy IR35 Shield.
The firm polled 3,750 contractors – nearly 19% of whom worked in IT – about how their clients responded to the introduction of the reforms, while also seeking details about how the employment prospects for contractors have been affected in the months since the reforms came into force.
The reforms, introduced by HM Revenue & Customs (HMRC) as part of its ongoing clampdown against disguised employment, were first rolled out to the public sector in April 2017 before being extended to the private sector in April this year.
Before the changes came into force, limited company contractors were responsible for determining whether or not the work they did for their end-clients meant they should be taxed in the same way as permanent employees (inside IR35) or off-payroll workers (outside IR35).
The key difference between these determinations is that inside-IR35 contractors are liable to pay the same employment taxes and national insurance contributions (NICs) as permanent employees, but are not entitled to receive workplace benefits such as holiday pay or pension contributions.
According to HMRC, this system of self-classification has resulted in some contractors deliberately misclassifying themselves as working outside IR35 in an effort to minimise their employment tax liabilities.
To counteract this, HMRC has now revised the IR35 rules so that responsibility for determining how contractors should be taxed falls on the end-client, and it is a change – as demonstrated by the IR35 Shield data – that not all firms have taken kindly too.
Nearly half of respondents to the IR35 Shield poll (47%) said their clients responded to the shift in responsibility by imposing blanket bans, introducing hiring policies that prohibited the use of limited company contractors altogether.
Private and public sector organisations that have resorted to blanket bans have typically told contractors they can only continue to work for them if they provide their services through an umbrella company.
The vast majority of respondents to the IR35 Shield poll (88%) said they have been told they must provide their services through an umbrella company, with just 6% saying they are happy to work this way.
Read more about IR35
- Litigators are circling as thousands of contractors realise that the 2017 roll-out of IR35 reforms to the public sector may have resulted in unlawful tax deductions – and the private sector could be next.
- The government is again facing calls to amend its IR35 tax-avoidance legislation as concerns mount about its potential to be misused by employers to cuts costs by hiring contractors to effectively work as “zero-rights” employees.
As previously reported by Computer Weekly, some blanket-banning firms coupled their contractor hiring bans with a push to ramp up their use of overseas labour by outsourcing projects to consultancies in other countries.
Just under 60% of respondents said their firms had responded to the reforms in this way, with 50% claiming they anticipate that firms that went down this route will have suffered long-term damage to their business prospects as a result.
Also, 65% of respondents said their firms had lost at least half of their contractors, and 35% said the clients they worked for were forced to cancel projects in the aftermath of the reforms coming into play.
Dave Chaplin, CEO of IR35 Shield, said many organisations are now still struggling to pick up the pieces after taking a more risk-averse approach to complying with the reforms.
“The pressure on businesses during the pandemic and mixed messaging fuelled the decisions of firms to issue blanket bans, leading to commercial self-harm,” he said. “The bans meant that many firms cut off their ability to hire the best talent, leading to cancelled and delayed projects.
“Some 48% of contractors told us that firms had moved some of their projects offshore – unnecessarily benching UK workers may not have been what the Treasury had in mind to increase the tax take.”
However, there are signs on the horizon that the situation for both contractors and end-clients is set to improve in due course, said Chaplin.
“Indications from our IR35 frontline shows that firms are now realising that the legislation is entirely manageable with a robust compliance process in place,” he said. “Those firms that implemented blanket bans as a knee-jerk reaction in the early days are now realising that they have no option other than to engage with the new rules and conduct proper assessments in order to attract the talent they need.
“It has been a challenging 2021 but it would appear that the blankets are starting to lift, which is good news for contractors and for UK plc and the economy overall as we embark on a new year.”