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Serious flaws exposed in HMRC’s research into the impact of IR35 reforms

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Prior to the Christmas break, HMRC finally published its long-awaited research into the impact of IR35. Despite the Treasury continuing to play down the impact of the IR35 reforms, their own commissioned research now exposes some serious flaws with the reforms.

Using IPSE research into IR35 from the past two years - and this latest piece of analysis from HMRC - we’ve compiled a table below to highlight the damaging impact of the reforms for both contractors and clients alike.

The Sample

Before we dive into the comparison, it’s worth pointing out that HMRC’s research is based on a telephone survey of 353 medium and large sized clients, and follow-up interviews with 39 of these clients. For comparison, IPSE’s research into the impact of IR35 on clients was based on a sample size of 501 clients, with the fieldwork carried out by YouGov.

Similarly, IPSE’s research split out clients based on the number of employees, whereas HMRC’s research splits out clients into the following two classifications:

Group-level organisations – Clients that are part of a larger owned group and deal with the administration of contractors for all or multiple establishments within this group

Establishment-level organisations – Clients that carry out the administration of contractors for an individual organisation and not part of a group

Below is a comparison of HMRC’s key findings compared to IPSE’s research:

 

HMRC’s Research:

IPSE Research:

Impact on number of contractors engaged
  • Among group-level organisations, 41% of clients had decreased engagements
  • Among establishment-level organisations, 29% of clients had decreased engagements
  • Among clients with more than 1000 employees, 32% had decreased engagements
  • Among clients with less than 1000 employees, 23% had decreased engagements

Impact on use of umbrella companies 

  • Among group-level organisations, 62% had engaged via an umbrella
  • Among establishment-level organisations, 72% had engaged via an umbrella
  • 68% of clients reported that they were likely to continue using umbrella companies for at least some engagements
  • 14% of clients only pay contractors through an umbrella company

Impact on number of inside/outside IR35 determinations
  • Among group-level organisations, 22% reported all contractors fell inside IR35
  • Among establishment-level organisations, 29% reported all contractors fell inside IR35
  • Clients reported that, on average, 33% of engagements were inside IR35
  • Clients with less than 1000 employees were more likely to report that their engagements were outside IR35 than clients with more than 1000 employees (25% compared to 14% respectively)

Impact on IR35 determination process
  • 85% of group-level organisations assessed on a case-by-case basis
  • 81% of establishment-level organisations assessed on a case-by-case basis
  • 20% of group-level organisations used a third-party company
  • 32% of establishment-level organisations used a third-party company
  • 4% of group-level organisations made a blanket determination
  • 9% of establishment-level organisations made a blanket determination
  • 45% of clients provide individual assessments for every contractor engagement
  • 22% of clients make an IR35 assessment themselves without using any tools or software
  • 17% of clients had used a third-party company
  • 8% of clients used a tool or piece of software other than the CEST tool
  • Clients with less than 1000 employees (28%) were more likely to make an IR35 assessment themselves without using any tools or software than clients with more than 1000 employees (18%)

Impact on disputes during the determination process
  • Among group-level organisations, 12% had experienced at least one dispute over status determinations
  • Among establishment-level organisations, 15% had experienced at least one dispute over status determinations
  • 29% of contractors disagreed with their IR35 status determination
  • Of those who disagreed with their IR35 status determination, 77% had challenged their client’s determination
  • 79% of those who challenged their status determination reported no change
  • 17% reported that their IR35 determination was successfully changed

Awareness of avoidance schemes used to circumvent the IR35 rules
  • 16% of group-level organisations were aware of avoidance schemes or structures
  • 21% of establishment-level organisations were aware of avoidance schemes or structures
  • 14% of umbrella company workers have suspected an umbrella company to be adopting a tax avoidance scheme

Difficulty in navigating the reforms
  • Among group-level organisations, 29% found it difficult
  • Among establishment-level organisations, 24% found it difficult
  • 47% agreed that IR35 compliance had been an administrative burden since the introduction of the reforms

CEST tool
  • 88% of group-level organisations had used the CEST tool
  • 79% of establishment-level organisations had used the CEST tool
  • Of those that used the CEST tool, the research found that it had led to a 35% decrease in contractor engagement

 

Cost of compliance to businesses
  • 28% of group-level organisations pay more than £5,000 in compliance costs per year
  • 26% of establishment-level organisations pay more than £5,000 in compliance costs per year
  • 42% of clients agreed that the changes to IR35 have had financial implications for their business

Impact on clients attracting freelance talent
  • Among group-level organisations, 44% reported it was more difficult to recruit contractors
  • Among establishment-level organisations, 42% reported it was more difficult to recruit contractors
  • 35% of clients agreed that it had been more difficult to attract the freelance talent that their business needs as a result of the IR35 changes

Despite HMRC’s research differing from IPSE's with regard to the navigability of the reforms, the research closely aligns on multiple areas – producing a damning indictment on the effectiveness of the legislation and the impact on businesses and contractors.

Most notably, HMRC’s research highlights the sheer cost of compliance to businesses, with over a quarter of clients paying more than £5,000 in compliance costs per year – and the difficulty in recruiting freelance talent, with over two in five clients reporting it was more difficult to recruit contractors.

Interestingly, HMRC’s research differed significantly from IPSE’s survey of clients over blanket determinations, making just one reference to the implementation of blanket bans on those operating through limited companies as a footnote. Instead, we all know that blanket bans from clients were commonplace, particularly in the financial services and banking sectors from 2020 onwards.

Taken together, this latest piece of research from HMRC and IPSE’s research from the past two years forms a powerful narrative. It is evident from the key areas outlined above that the reforms have plagued contractors and clients alike, but it is also clear that the reforms are having a knock-on impact on the UK's economic performance.

At a time where the UK is crying out for growth, the government would do well to recognise the research findings and realise that IR35 is holding back not only the self-employed sector, but also wider economic growth.

Meet the author

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Joshua Toovey

Senior Research and Policy Officer

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