IR35 reform

The impact of IR35 reform

Matt Tyler discusses new research into the impact of IR35 reforms since their introduction in 2021 and what this means for the accountancy sector.

Matt Tyler IR35 Consultancy Manager, Kingsbridge

The IR35 reforms were met with concern from many industries that rely on skilled contractors when they were introduced in 2021. One year on, it is clear that a continued lack of understanding around the new rules is stifling access to specialised talent which, in turn, is impacting businesses’ growth across the UK.

Skilled contractor labour is essential for many industries across the UK, particularly during the ongoing skills shortages following the pandemic. According to IPSE data, contractors contributed £300 billion to the UK economy in 2021 alone (see bit.ly/3loQt5P). The accountancy sector is no exception, with many firms relying heavily on skilled contractors, alongside permanent members of staff.

With this in mind, we were interested to discover the true impact of the IR35 reforms on the market. To find out more, we conducted research amongst contractors, recruiters and end clients – businesses that work with contractors – including organisations in the accountancy sector, asking them questions about their experiences over the last 12 months.

A changing landscape

The research revealed that IR35 has been the biggest obstacle to hiring contractors over the past 12 months for 50% of the end clients surveyed, coming in above the likes of Brexit and the pandemic, which have also had a disruptive effect on the market. In fact, over 70% of businesses and recruiters reported that they had seen a reduction in their limited company PSC contractor workforce.

We found that end clients and recruiters are increasingly struggling to place contractors in inside IR35 roles – positions that are considered ‘employees’ for tax purposes and therefore likely to be taxed at a higher rate. Over 70% of contractors are looking only for outside IR35 roles over the next six to 12 months, with 66% claiming they would not even consider an inside IR35 role. Yet, these account for less than 41% of roles on offer. Clearly, there is a disparity between the roles on offer and the opportunities contractors are looking for.

As a result, nearly half of contractors have considered closing their businesses and 25% have sought work outside the UK. For accountancy businesses, this means increasingly restricted access to a much needed, highly skilled and flexible workforce which has previously been relied upon by the industry.

The timing of this couldn’t be worse. Whilst job vacancies remain at a record high, contractors could be providing a much needed interim solution to keep things working and avoid major disruption to UK businesses. Sadly, the complexities of IR35 and perceived risks are putting businesses off.

Another obstacle facing accountancy firms working with contractors is an increase in day rates. The research showed us that as many as 65% of contractors would try to negotiate an increased rate if placed inside IR35, with respondents suggesting that this could be up to a 25% increase.

We’re already beginning to see this in practice. 37% of contractors deemed inside IR35 have increased their day rate in the last 12 months, compared with just 20% of those deemed outside IR35. This means that accountancy businesses are almost twice as likely to have to pay a contractor more if they work inside IR35.

CEST and its limitations

An incredible 50% of recruiters told us that end clients were not well prepared for IR35 reform in the private sector, indicating that more education was – and still is – desperately needed.

Too many companies are relying on the government’s Check Employment Status for Tax (CEST) tool, a free service consisting of multiplechoice questions leading to a decision on IR35 status. However, despite strong encouragement from HMRC to use it, the tool remains insufficient for assessing status and has been heavily criticised by businesses and the House of Lords. Others have adopted misguided blanket bans on contractors, or are working with umbrella companies, which also demonstrates ongoing confusion and caution.

In fact, I believe CEST is having a direct impact on the decreasing pool of contractors. 38% of the recruiters who stated their end clients use CEST have seen a 61% or greater reduction in their contractor pool, compared to just 23% who use independent employment status tools. This is likely due to the fact that end clients simply can’t rely on CEST to give a clear inside or outside status determination, with the tool producing indeterminate results 21% of the time.

Reasons for optimism

The last year has certainly presented significant challenges when it comes to working with contractors in the UK, and end client projects have ultimately suffered.

Despite this, there are signs that the situation is improving. As many as 95% of end clients claimed they intend to use more limited company contractors in the next six to 12 months.

Recruiters echoed this message, telling us they foresee fewer bans on working with contractors in the year ahead and even reporting that some end clients are beginning to make U-turns on the blanket bans they introduced when the reforms were first introduced.

Interestingly, independent employment status tool users have seen more blanket ban U-turns from their end clients than CEST users (44% versus 26%). In other words, employers using independent status tools are twice as likely to reverse their blanket bans on working with contractors than those using CEST.

In addition to an increase in the number of businesses lifting blanket bans on working with contractors, our research shows us that a growing number of contractors (42%) are optimistic about their job prospects for the next six to 12 months.

Looking ahead

However, there is still work to be done to accelerate this positive change and avoid losing access to the skilled talent businesses need. In my opinion, three key changes are required to ensure real progress:

1. More education is needed to address the issues still being experienced. A better understanding of IR35 would be much healthier for the market as a whole.

2. CEST must be made fit for purpose and take Mutuality of Obligation (MOO) into consideration to offer accurate status determinations and therefore improve confidence amongst end clients.

3. Companies looking to hire experienced contractors outside of IR35 should utilise purpose-built tools, advice and insurance to mitigate against the perceived risks of hiring contractors.

For more information about the research, download your free copy of the ‘IR35 – One Year On’ whitepaper (see bit.ly/3yKMYyl).