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The number of contractors in the UK who have worked outside IR35 following the roll out of reform in the private sector this year has surged by 83% since 6 April 2021, according to research by Qdos.

Qdos’ annual contractor survey, which 1,248 contractors participated in, shows that nearly two thirds (64%) of contractors have been able to secure a contract deemed outside of IR35 since reform.

This is an 82.8% increase on the contractors (35%) who had been placed outside IR35 by their end client in the lead up to and upon the arrival of the changes.

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Despite the increase, contractors said securing an outside IR35 role hasn’t been straightforward. Less than a quarter, or 22%, said it has been easy, 40% have not noticed any change in difficulty since 6 April, while 38% said there is now a scarcity of contracts classed outside IR35.

Due to this, IR35 reform was highlighted by 72% of contractors as the event that impacted them most in 2021, behind Covid-19 (20%). Meanwhile, 61% still see IR35 reform as the biggest threat to this way of working in 2022.

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Qdos CEO, Seb Maley, said, “The surge in contractors able to secure contracts outside IR35 since April will give many of these workers a boost heading into the new year. That the number of contractors being placed outside IR35 has nearly doubled is the first real indicator that more businesses are managing reform in a pragmatic way. It also shows that fewer firms are forcing everyone onto the payroll – a needless and expensive approach in more ways than one.”

“There is still plenty of room for improvement, though. Outside IR35 contracts are on the up, but even so, lots of contractors are still struggling to source these. IR35 itself has also been earmarked by contractors as the biggest threat to this way of working next year,” Maley said. “In 2022, businesses that have banned contractors in response to reform should reverse these costly decisions, taking note of the rising number of firms benefiting from engaging them compliantly outside IR35.”

Source: SIA

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More than a third, or 35% of contractors in the UK have left self-employment since the changes to IR35, either moving into permanent employment, retiring, working overseas or simply not working, according to research from The Association of Independent Professionals and the Self-Employed (IPSE).

The research also found that of those who remain, 34% are now working through “unregulated” umbrella companies and 36% are working through engagements deemed ‘inside IR35’.

Meanwhile 80% of contractors working inside IR35 said they had seen a drop in their quarterly earnings, by an average of 30%. A quarter said their income had dropped by over 40%.

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According to IPSE, a significant problem seems to be the implementation of the rule changes by clients. Under the new rules, clients are now required to give contractors a Status Determination Statement (SDS) to confirm their IR35 status, but nearly two out of five (38%) said their clients had not done this.

One in five (21%) contractors said their clients had also blanket assessed all engagements as inside IR35, while one in ten (11%) said their clients had blanket banned contractors altogether. Another 34% said they were now having to work through “unregulated” umbrella companies for their clients.

Nearly a quarter (23%) of all contractors working through umbrella companies say they are dissatisfied with their umbrella company, compared to 46% who are satisfied.

One key area of concern is business expenses, which most contractors now cannot claim from their umbrella company: 55% were dissatisfied with this. Another key concern is the cost of Employer’s National Insurance: 33% said they were dissatisfied with this.

HMRC introduced IR35 reform to the private sector in April 2021 in the expectation that compliance will become easier to police, that end-users will take a more compliant approach to IR35 assessments and that they will be more likely to conclude that contractors are in scope, resulting in increased tax and national insurance contributions.

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Andy Chamberlain, Director of Policy at IPSE said, “We are urging government to review the situation in the contracting sector and be open to radical steps based on that, including, if necessary, repealing the changes altogether. Government must also urgently set out detailed regulations for how umbrella companies should operate and also work to clear the confusion across self-employment by clarifying when it is right for people to operate as sole traders, employees or limited companies.”

Dave Chaplin, CEO of IR35 Shield said, “Whilst freelancers have succumbed to the triple whammy from the pressures of Brexit, the pandemic and the latest incarnation of IR35, our experience suggests this is a bottoming out of the market, and that it is starting to grow again.

“Many firms choose what they may have considered the easy option, by attempting to remain cost neutral and risk free by pushing a blanket ban on contractors from operating via PSCs (personal service companies). But some have since realised this has put them at a disadvantage in the competing market for talent compared to firms who have implemented processes enabling them to continue to hire contractors on an ‘outside IR35’ basis,” Chaplin said.

Crawford Temple, CEO of Professional Passport, an independent assessor of payment intermediary compliance said, “My message to workers is that if they are offered something that is too good to be true then it is probably a disguised remuneration scheme that will set them up for financial difficulties in the future. HMRC already holds all the information it needs to stamp out disguised remuneration schemes and rid the industry of criminal activity but is not acting on it. As a result, the lack of inactivity has enabled more and more schemes to set up and more and more contractors duped into taking on significant personal financial risk as a result.”

Earlier this year the Department for Business, Energy and Industrial Strategy published its consultation report which confirmed that the new enforcement body will also regulate umbrella companies.

Source: SIA

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More than a third (35 per cent) of contractors have left self-employment since the changes to IR35, either moving into permanent employment, retiring, working overseas or simply not working.

According to the Association of Independent Professionals and the Self-Employed (IPSE), of those who remain, more than a third (34 per cent) are now working through unregulated umbrella companies and another third (36 per cent) are working through engagements deemed ‘inside IR35’.

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What is IR35?
IR35 or the off-payroll working rules can apply if a worker or contractor provides their services through their own limited company or another type of intermediary to the client, but who would be an employee if the intermediary was not used.

Self-employed contractors typically work under this kind of arrangement to reduce the tax they pay. Such workers are called ‘deemed employees’ by HMRC.

The IR35 rules aim to make sure that a worker, who would have been an employee if they were providing their services directly to the client, pays broadly the same tax and national insurance contributions as an employee.

In the past the contractor decided whether their working arrangements fell inside or outside IR35. But since April 2021, their employment status has been determined by the client. If the client decides that IR35 should apply to the engagement, payment to the contractor will be taxed at source.

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Financial consequences
IPSE says that working inside IR35 not only leaves contractors essentially in no-rights employment; it also has significant financial consequences. Four out of five (80 per cent) contractors working inside IR35 said they had seen a drop in their quarterly earnings – by an average of 30 per cent. A quarter even said their income had dropped by more than 40 per cent.

A significant problem seems to be the implementation of the rule changes by clients. Under the new rules, clients are now required to give contractors a Status Determination Statement (SDS) to confirm their IR35 status, but nearly two out of five (38 per cent) said their clients had not done this.

One in five (21 per cent) contractors said their clients had also blanket assessed all engagements as inside IR35, while one in 10 (11 per cent) said their clients had blanket banned contractors altogether. Another 34 per cent said they were now having to work through unregulated umbrella companies for their clients.

One in four (23 per cent) of all contractors working through umbrella companies say they are dissatisfied with their umbrella company, compared to 46 per cent who are satisfied.

One key area of concern is business expenses, which most contractors now cannot claim from their umbrella company: 55 per cent were dissatisfied with this. Another key concern is the cost of employer’s National Insurance: 33 per cent said they were dissatisfied with this – most likely because many umbrella companies are passing this cost onto contractors through a deduction from their day rate.

‘Devastating impact’
Andy Chamberlain, director of policy at IPSE, said: “Contractors are the most productive part of the crucial self-employed sector, which overall contributes more than £300bn to the UK economy every year. Not only that: they are absolutely vital for economic recovery, providing invaluable flexible skills to businesses getting back on their feet and adapting. But just when this sector is needed most, it has been hamstrung by the changes to IR35.

“This research shows the devastating impact the changes to IR35 have had on contractors, needlessly compounding the financial damage of the pandemic and the unnecessary gaps in support. Now, just when contractors are needed most – amid mounting labour shortages across the UK and particularly in haulage – government decisions have driven out a third of the sector.

“Contractors now find themselves with myriad different and complex ways of working – each with its own pitfalls. They are now divided between those still managing to work outside IR35, those working through unregulated – and sometimes unscrupulous – umbrella companies, those working inside IR35 for less pay and with no rights, and others now on client or agency payrolls.”

By Emma Lunn

Source: Mortgage Solutions

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It’s no secret that the UK is short of HGV drivers. But while a combination of Brexit and Covid-19 have exacerbated the issue, there’s another reason behind it: IR35 tax changes.

However, IR35 doesn’t just affect lorry drivers, it affects contractors throughout the UK. Here’s what it is, what it means for all ‘off-payroll’ employees and why it’s made a precarious situation even worse.

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What is IR35?

IR35 is basically a set of tax rules.

The rules aim to weed out what’s called ‘disguised employment’. This happens when someone works as a contractor (for instance, through their own limited company) but fulfils the role as any other permanent employee hired by the company would.

Disguised employment often happens because of the tax benefits it brings.

For employers, it means avoiding National Insurance (NI) contributions. It also means employers don’t have to provide regular staff benefits (like pension contributions).

There are benefits for the contractor too. Limited companies are ‘tax efficient’ partly because you take home less pay (and therefore pay less tax). You can then bulk out your income through dividends which are exempt from National Insurance.  

The government hopes that IR35 stamps out these practices in order to raise more revenue through otherwise ‘lost’ taxes.

How does IR35 work?

To distinguish between disguised employment and genuine self-employment, there are two types of status within IR35.

1. Inside IR35

This is where you’re considered an employee. For example, you use equipment provided by the company you’re contracted to. It’s also recognised as working on a rolling contract basis rather than completing one-off projects for a range of clients.  

If you’re considered to be working inside IR35, you and the company you contract for are subject to all the usual taxes, such as Income Tax and National Insurance.

Outside IR35

This is considered genuine self-employment. This is broadly accepted as being in control of where and when you work, and usually for more than one client at a time.

It can also mean using your own tools and equipment in order to complete the work.  

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So, how does IR35 affect HGV drivers?

IR35 affects HGV drivers for a couple of reasons.

The first, is that many are (or were) employed by agencies as freelancers or contractors. But, these drivers would use agency lorries and be given specific work schedules.

This means the drivers fall inside IR35 rules and (technically) work for their agencies as they have no control over their schedules and aren’t driving their own lorries.

As it stands, these agencies work to tiny margins (around 2% to 3%). Some agencies have started to employ drivers inside IR35 and provide all the workplace benefits that go with it. For others, it’s become an unsustainable business model.

Secondly, for drivers, it means losing the flexibility of contract work and being forced into employment terms they may not be happy with (including less take-home pay).

Research by the Association of Independent Professionals and the Self-Employed (IPSE) seems to support this. In its study, IPSE found that only 17% of contract drivers would actually choose to seek an employed role.

Half of contractors planned to stop working in the UK while 24% said they would try and find work in another sector.

A reasonably large minority (12%) said they would stop working completely and 11% planned to retire instead.

Not only that, the ins and outs of IR35 are complex and often subject to interpretation. This has made many agencies and firms worry about getting it wrong and facing penalties as it’s down to them to work out whether someone is working inside or outside the new rules.

All in all, IR35 is part of a bigger and more complicated picture. Yet there are few doubts that it’s contributed to the HGV crisis that shows little sign of getting better anytime soon.

By Anne East

Source: The Motley Fool

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Over half (56%) of contractors are planning a move to permanent employment due to the IR35 reforms which came into effect earlier this year.

The study by leading small business insurance provider Simply Business – which spoke to over 250 contractors – also revealed that 91% of contractors say the IR35 reforms will impact their business. Of those, two thirds (55%) say it will have a significant impact.

With the IR35 reform proving a costly headache, half (50%) believe the changes should be scrapped altogether, and two in five (38%) say the changes need rethinking.

As the country looks to bounce back from the impact of the pandemic, a staggering 98% of contractors believe the reform will have a negative impact on economic recovery, with two in five (40%) believing a less flexible workforce – as more contractors go permanent – will harm the UK.

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It comes as previous research by Simply Business revealed one third (32%) of contractors expect to miss out on over £20,000 in take-home pay as a result of the reform – while one in five (20%) expect to miss out on between £10,000 and £20,000 each.

Contractors form a crucial part of the five million self-employed people in the UK. Kevin Neal and Bill Cunnew are just two out of thousands of contractors in the UK considering the long-term effect and shattering financial loss surrounding the changes to IR35.

Kevin Neal, IT contractor comments: “The IR35 reform means I have lost an eighth of my pay to tax, fees and pension, which will have a substantial impact on my income. I feel persecuted for doing nothing more than trying to earn a living. I pay my taxes, I always have. The Inland Revenue should focus on those who do not instead of making sweeping changes that affect everyone.”

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Bill Cunnew, IT contractor notes: “I contracted for 26 years through my own limited company, I earned good rates but due to IR35 the banking and insurance sector has just stopped taking LTD company contractors. After one year out of work I was forced to take a permanent job on a lot less money, as a result I am now paying about 25% of the tax I paid as a contractor.”

Alan Thomas, UK CEO at Simply Business, comments: “Six months on, the IR35 reforms have impacted countless contractors across the UK, and have seen many miss out on a substantial part of their take-home pay. Contractors are a vital part of the economy, and with one in three expecting to miss out on over £20,000, it’s no surprise to learn that more than half intend to make the switch to permanent employment.

“We know the last 18 months have been especially difficult – many of whom were left without government support – and that despite IR35’s delay, simple, easy-to-understand guidance was difficult to find.

“Contractors should be seen as an incredibly important part of our workforce. SMEs, self-employed and freelancers in the UK contribute trillions of pounds to the economy, and will be crucial to our recovery. Now more than ever it’s vital that we support our self-employed communities – this is why we’ve launched a free IR35 hub to offer guidance to contractors affected by the reform.”

Source: LLB

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The government finally introduced IR35 reform in the private sector six months ago. At the time, a Simply Business survey revealed that nearly a third of contractors expected reform to cost them more than £20,000.

Medium-sized businesses don’t have a formal IR35 process in place

According to a survey from tax advisory firm BDO, more than half of medium-sized businesses don’t have a formal process in place for assessing a contractor’s employment status (small businesses are exempted from the change).

55 per cent of these firms said that they’ll worry about IR35 once their business gets back to normal after Covid-19.

But despite HMRC’s ‘light touch’ on compliance for the first 12 months of private sector reform, BDO warns that businesses should adapt quickly: “Businesses who do not comply will still need to pay tax and could face significant penalties. HMRC has shown that it will not turn a blind eye to non-compliance”.

Contractors will pay more in tax next year

The government is hiking National Insurance by 1.25 per cent for employees, employers, and the self-employed from April 2022.

The government has also announced that it’ll be hiking the dividend tax rate by 1.25 percentage points from April 2022, too.

These increases stack up more challenges for a sector already struggling with IR35 reform.

Matt Fryer tells Contractor UK that umbrella company contractors will be hit twice as hard by the National Insurance hike, “where the contract rate includes the employer costs which is predominantly employer’s NIC.”

HMRC is checking ‘payroll compliance’

HMRC has promised that it won’t launch enquiries into personal service companies (PSCs) unless it suspects that they’re deliberately breaking the rules.

But Nigel Nordone explains for Contractor UK that two contractors he supports are currently undergoing PAYE compliance checks. This involves HMRC checking payroll to clarify how contractors are paying themselves.

Nordone explains that this could give HMRC a back-door to investigating IR35 compliance, without breaking its promise to refrain from launching enquiries unless foul play is suspected.

Even government departments can’t get IR35 right

According to FT Adviser, three government departments have been given huge bills by HMRC for not applying IR35 rules correctly. While private sector IR35 reform was only introduced in April 2021, the public sector has been grappling with the changes since 2017.

• HM Courts & Tribunal Service paid £12.5 million to HMRC in 2020-21 relating to incorrect status determinations between 6 April 2017 and 5 April 2020
• the Department for Work and Pensions paid £87.9 million to HMRC in 2020-21 for historic errors from 2017-2020, although a liability for 2020-21 was agreed too
• the Home Office paid HMRC £29.5 million for incorrect assessments, as well as £4 million for ‘careless’ application of IR35 rules

Seb Maley questions who might be next, adding: “given that HMRC’s fundamentally flawed IR35 tool, CEST, was used to decide the IR35 status of contract workers, I’m not in the least bit surprised that mistakes have been made.”

He urges businesses to make sure IR35 compliance is high in their priorities.

Roles can morph from inside to outside IR35 – so be careful

Contractor UK quotes an IT contractor as saying that one client they were hoping to work with changed the opportunity from inside to outside IR35 almost overnight.

They explained: “Possibly [due to not many candidates going forward], they might have changed the working practices, and then reassessed the contract. But I wouldn’t hold my breath on the [change to working practices] actually.”

If you notice any opportunities changing like this, Graham Webber, a director at WTT Consulting, urges caution: “a simple re-label to ‘outside’ is going to be a hard hurdle to overcome should HMRC [subsequently] ask any questions”.

CEST users are being shown an ‘undetermined’ status

Finally, the Express has reported on HMRC’s CEST data released in June 2021. CEST – or Check Employment Status for Tax – is HMRC’s tool that aims to provide a view on a particular worker’s employment status.

Both contractors and the clients they work for can use the tool to help them work out IR35 status.

But HMRC’s June data shows that 210,100 contractors from November 2019 to May 2021 were shown an ‘undetermined’ status, which suggests that many contractors are still not getting clarity over their status.

The Express further reports on a discrepancy in the data, quoting Matt Fryer: “According to CEST data, 49-56 per cent of all contractor roles clearly fall outside of IR35, with another 19-21 per cent in a grey area that the tool is unable to determine.

“Market data from Jobfeed, however, indicates that only 26 per cent of contractor roles are currently being advertised as outside IR35 (w/c June 7).”

Fryer questions where all of these outside IR35 roles are, suggesting that businesses might not have faith in the processes they’ve put in place to determine IR35 status – linking back to the first point in this article.

By Sam Bromley

Source: Simply Business