Contractors are “right to be fearful” of IR35 reform impact

Continuing scepticism from contractors around new IR35 rules is justified, according to industry experts, with public attention having been momentarily diverted from the issue due to the pandemic and other economic factors.

“It’s primarily because of the reactions of contractors’ clients. We’ve had very little consistency in approach,” says Seb Maley, CEO at insurance firm Qdos.

“They [contractors] know the legislation very well, and I think they were able to identify very quickly when the client they were working for wasn’t doing things fairly in their mind.”

In a recent survey of more than 1,200 contractors conducted by Qdos, nearly two-thirds (61 percent) highlighted IR35 reform as the “biggest threat” to their business.

Incoming dividend tax increases were identified as the second biggest threat (18 percent).

IR35: A ‘forgotten crisis’

The introduction of IR35 reform on April 6, 2021, saw the responsibility for assessing status shift from the contractor to the medium or large business engaging them.

As part of this reform, which mirrors changes introduced in the public sector in 2017, the liability also shifted from the contractor to the fee-paying party in the supply chain (either the recruitment agency or client).

“I think a lot of companies did rush into potentially rash decisions,” Maley adds, theorising that the pandemic has combined with the new rules to create a significant uptick in ‘inside-IR35 roles’ for contractors.

“A lot of preparations for the changes were quite rushed and perhaps weren’t top of the agenda.”

This point is echoed by Andy Chamberlain, director of policy at The Association of Independent Professionals and the Self-Employed (IPSE), who argues that IR35 is a “forgotten crisis” and that the pandemic has deferred the true impact of the new rules.

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

“[The Qdos] research shows that there is one forgotten crisis that has been even more economically damaging to many of those who work for themselves.”

IPSE research from December 2020 paints a similar picture. More than 70 percent of freelancers believe that the most detrimental factor to their financial wellbeing has been the recent IR35 changes, it found.

Chamberlain went on to argue that wholesale change needs to take place on a societal and legislative level if the contractor sector is to return to a healthy state.

“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.”

Room for optimism?

Maley goes on to argue that a “levelling of the playing field” is taking place, and that a more positive outlook may be warranted.

“Contractors are right to be fearful of the impact of the reform, but I think it’s very clear to see that there certainly is a future in contracting,” he says.

“I think now a lot of contractors can see that there are more and more outside-IR35 roles doing the rounds.”

In fact, April to November 2021 saw an 83 percent rise in contractors deemed outside-IR35 by their clients, according to the Qdos research.

In addition, 39 percent of contractors said that they are confident about their prospects for 2022.

“If you take a hard-line approach and say that you don’t want to engage contractors, then you’re cutting out vast swathes of that available market,” Maley says.

“We’ve seen a lot of very large companies who really have tried to do things properly and made sure that they are both compliant from a tax point of view but are also able to engage contractors outside IR35 and are therefore able to attract the best talent.”

Contracting and the wider economy

Maley also alludes to the broader significance of the contracting sector, which contributes more than £300bn to the economy each year, according to IPSE.

This, he argues, is the core reason why the sector should be protected.

“There’s always this misinterpretation that contractors in some way dodge tax, whereas the opposite is true when you actually look at the economic impact that the industry has,” he says.

“There’s obviously the contractors themselves providing the services, but there’s also tall of that support that goes around it.”

Accountants are a prime example of this, Maley adds, noting that they play a key role in supporting the contracting sector.

“Historically they’ve taken a prime position in terms of providing contractors with advice around IR35 and the tax risks, and I think that’s really important.”

Maley argues that this creates an important symbiosis, with the two sectors supporting one another.

“It [contracting] is a huge industry and one which really does need protecting – obviously for economic reasons, but also because of the value it provides to industry in the UK.”

However, since the 2021 reforms, a push from agencies and clients to edge contractors into umbrella companies has left the services of accountants redundant in many cases.

Maley acknowledges this, suggesting that the tide may be turning and that accountants could be presented with new opportunities in the coming months and years.

“What’s very clear now is that there are a lot of new people coming into contracting. I think there’s a big opportunity for accountants to be on the crest of that wave.”

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