The proposed changes to the off-payroll tax legislation (often referred to as IR35) are due to come into the private sector in April 2021. This would see the responsibility for determining IR35 status shifted from contractors to end-clients and extend the damaging effects of these rules, which were implemented in the public sector in April 2017. The announcement of the intended extension to the private sector, previously delayed for twelve months due to the pandemic, has led many end-clients to make blanket IR35 decisions due to the complexity of the process.
We know from previous research that freelancers, particularly limited company directors, are extremely concerned about the IR35 changes. In fact, over two-thirds (70%) of freelancers were worried about the impact of the changes while among limited company directors, who are more likely to be affected by the changes, this rose to 88 per cent.1 Similarly, in light of the upcoming IR35 tax reforms, the most highly skilled freelancers have now cited government tax policy, not the pandemic, as the leading adverse factor negatively affecting their businesses.2
These findings substantiate HMRC’s own findings that freelancers are concerned and lacking information on the full impact of the reforms. In fact, the Behaviour, Insight and Research Team found that freelancers wanted significantly more information about what the reforms would mean for tax obligations in the future.3
Our research with over 1,500 freelancers and contractors about the changes to IR35 shows the legislation will have a significantly detrimental impact on the sector. The results revealed that 24 per cent of clients have already said to their contractors that they will determine all engagements with them to be inside IR35 – a blanket assessment – while 21 per cent report their client will only work with them if they are engaged via an umbrella company.
Although 16 per cent of clients have said they will use external experts to make the IR35 assessments, 8 per cent have said they will stop engaging contractors altogether. The complexity of the proposed system – and the difficulties this causes – are likely to have a significant impact on freelancers and contractors, especially if clients are simply unwilling to engage them.
The fact that 17 per cent of clients have still not indicated what they will do after the legislation’s introduction in April 2021 suggests that clients are not ready for it – and that the lack of understanding could have a damaging impact on contractors.
In addition, clients have given varied responses as to whether they will be making assessments with or without the CEST (Check Employment Status for Tax) tool. Almost one in five (19%) have said they intend to use the CEST tool to make the IR35 assessments while 10 per cent have said they will be making assessments without it.
As a result of the changes, half (50%) of freelancers have said they plan to stop contracting in the UK – although of these, 57 per cent said they would continue if they could find outside-IR35 contracts. A total of one in four (24%) said they plan to seek contracts abroad, one in eight (12%) plan to stop working altogether, 17 per cent are planning on seeking an employed role and 11 per cent are planning on retiring within the next year.
Adapting to the changes, 19 per cent of contractors said they are planning to work via umbrella companies. Overall, though, over half of all UK freelancers (56%) said they plan to continue contracting in the UK only if they can find contracts that are deemed to be outside IR35.
However, on a more positive note, one in five (20%) did say that they would continue to work as a contractor regardless of their IR35 status. 10 per cent remained unsure about how they intended to work after the introduction of the changes.
The extension of IR35 to the private sector has already been significantly detrimental to freelancers and we are yet to see the full impact of the April roll-out. In particular, the fact that 24 per cent of clients have already said that they will determine all engagements with contractors as inside IR35 – a blanket assessment – demonstrates the potentially devastating cost on the flexible labour market and the wider economy. Similarly, our findings show alarming concerns for the UK economic recovery with almost one in four (24%) planning to seek contracts abroad. In addition, with the majority of freelancers (56%) planning to look for contracts that are deemed to be outside IR35, we are likely to see widespread implications for freelancers – in particular if clients are making blanket IR35 assessments or simply refusing to engage freelancers altogether.
- The government should delay the April roll-out of IR35 in the private sector for at least a further twelve months in order to protect the flexible labour market, thousands of compliant UK businesses and the wider economy
- Government should consider alternative arrangements such as IPSE’s Freelancer Limited Company concept and/or the idea of end-clients paying an Engager’s National Insurance
- Government should implement the recommendations from the Taylor Review of Modern working Practices to provide clarity on employment and tax status.