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The recent reform of IR35 legislation is “stifling” access to specialised talent in the UK, according to research.

Some 50 per cent of companies said IR35 was the main obstacle to hiring contractors in the past 12 months.

This has led to 70 per cent of businesses and recruiters seeing a reduction in their limited company contractor workforce, according to a survey of 1,200 contractors, recruitment businesses and end clients in February this year by Kingsbridge Contractor Insurance.

The same percentage of contractors will now only look for roles that are outside IR35 rules over the next six to 12 months, despite these accounting for 41 per cent of roles on offer.

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Two thirds (66 per cent) of contractors said they would not even consider a role inside IR35 rules.

Paul Havenhand, chief executive of Kingsbridge Contractor Insurance, said the UK economy is “being hampered” by a severe recruitment crisis.

“Contractors, as a highly skilled, flexible resource, could be providing a much-needed interim solution to keep things working and avoid major disruption to UK businesses,” he said.

“But there has been a 11 per cent drop in working contractors in the last twelve months.

“The complexities of IR35 and perceived risks are putting businesses off.”

The research was conducted for Kingsbridge, as part of a whitepaper called ‘IR-35 – One Year On’.

The white paper said half of recruiters surveyed feel that end clients were not prepared for the reform in the private sector, which Kingsbridge said suggests that “further education” is required.

Furthermore, it said HMRC’s Employment Status for Tax tool (Cest) is ‘not fit for purpose’ and is ‘hampering business growth’ by blocking access to contract labour.

“Recruitment agencies who reported that their end clients use Cest have seen a larger reduction of limited company contractors engaging in providing services compared to independent employment status tool users,” it said.

This was based on 38 per cent of the recruiters surveyed who said their end clients who use Cest have seen a 61 per cent or greater reduction in their contractor pool, compared with 23 per cent who use independent employment status tools.

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One criticism of the tool was that it produces indeterminate results 21 per cent of the time.

An HMRC spokesperson said: “HMRC will stand by Cest’s results provided accurate and correct information is used, in accordance with our guidance. The tool was rigorously tested against case law and settled cases by officials and external experts.”

Legislative reform

IR35 is a tax law that was reformed in April last year to require the end client, and not the contractors they hire, to decide if the working relationship resembles a self-employed engagement or employment. As part of this reform, the fee-paying party (either the end client or recruitment agency) now shoulders the liability.

The aim of the reform was to stop the promotion and misselling of disguised remuneration schemes, however the legislation has received criticism.

In April last year, the All-Party Parliamentary Loan Charge Group said the government needs to accept the “obvious reality” that IR35 legislation is “fundamentally flawed”.

The group said while it understood and supported the aim of stopping employees from seeking tax advantages for falsely claiming to be self-employed, the IR35 rules had “ironically muddied the waters and unintentionally made it harder, not easier, to define contracting and freelancing”.

An HMRC spokesperson said: “The off-payroll working rules ensure that individuals working like employees, but through their own limited company, are taxed like employees.

“The changes that took effect last year ensure that rules which have been in place since 2000 are applied correctly. We consulted extensively on off-payroll working and are continuing to deliver an extensive education and support programme to help industry and contractors implement the reform.”

“How an organisation decides to engage its workers remains a business decision for organisations to make.”

By Sally Hickey

Source: FT Adviser

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Contractors most concerned about impact of IR35 reform in 2022

Despite confidence in the economy returning since the easing of Covid restrictions, IR35 reform, which came into force in April last year, remains the stand-out concern for contractors.

A survey of more than 1,200 contractors by insurance firm Qdos found that three in five (61%) see IR35 as the “biggest threat” to working this way in 2022.

This is more than ten times the number of contractors who see Covid (6%) or Brexit (6%) as the biggest concern. The incoming increase to dividend tax was earmarked as the second biggest difficulty for this sector.

According to research by IPSE, the freelance sector contributes £303bn to the economy annually. However, changes to IR35 – which have seen the responsibility for determining tax status shift from the contractor to the business engaging them –were found to have a big impact on contractors’ income.

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Reform driving people out of contracting

IPSE’s survey, which echoes Qdos’ findings, revealed that seven in 10 (70.9%) independent workers believe IR35 to be the most “detrimental” factor on their financial wellbeing. 

Andy Chamberlain, head of policy at the self-employment trade body, said: “While newspapers and news programmes are filled with analysis on the pandemic, inflation and the planned rise in National Insurance, today’s research shows that there is one forgotten crisis that has been even more economically damaging to many of those who work for themselves: IR35. 

“The changes to IR35 last year have had a devastating impact, with thousands leaving contract work altogether.”

In fact, a study published by IPSE showed that the number of solo self-employed people in the UK fell by five per cent in 2021 – the figure now stands at 4.1 million compared to 4.3 million in 2020.

Chamberlain added: “While it is positive to see research today on IR35, there needs to be more attention from the press and by the government to solve the issues around the flawed reform. 

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IR35 creates ‘plethora of challenges’ for contractors

“Put simply, without media and industry pressure and a governmental review, the changes to IR35 will continue to burden the whole supply chain – making it increasingly difficult for freelancers to make a living and for UK companies to source the flexible expertise they need to get projects done.”

Seb Maley, CEO at Qdos, said that while some businesses are starting to take a more “fair and pragmatic” approach, IR35 reform has still created a “plethora of challenges” for contractors, which is “jeopardising this way of working.”

“The fact that contractors still see IR35 as the stand-out threat in 2022 – and by some distance – tells you everything you need to know about the journey ahead, along with the progress that needs to be made this year.

“[…] Far too many businesses are insisting that contractors work on the payroll, regardless of their true IR35 status. Not only will this see businesses struggle to attract the flexible talent they need to recover from the pandemic, but forcing genuinely self-employed people onto the payroll will also result in significant and needless cost rises.”

What does this mean for contractors?

Omicron uncertainty and the challenges brought on by IR35 have made life difficult for contractors already this year. And until the government step in or businesses get to grips with the reform, the issues around IR35 could continue for some time.

With this in mind, it’s vital that contractors carry out their own diligence regarding IR35 compliance. And given HMRC can launch investigations retrospectively – to when contractors held the liability – independent workers are advised to hold IR35 defence insurance, which helps mitigate the risks presented by this complex and controversial legislation.

Source: Contractor Weekly

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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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