Introduction

The impact of IR35 changes on the self-employed in 2021

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

Findings

How are clients and contractors reacting to the changes?

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. 
 

 

Conclusion & recommendations

Conclusion & recommendations

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. 

Recommendations

  1. 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
  2. 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
  3. Government should implement the recommendations from the Taylor Review of Modern working Practices to provide clarity on employment and tax status.

 

Appendix

Appendix

About IPSE

IPSE is the largest association of independent professionals in the UK, representing freelancers, contractors and consultants from every sector of the economy. It’s a not-for-profit organisation owned and run by its members. We believe that flexibility in the labour market is crucial to Britain’s economic success, and dedicate our work to improving the landscape for the freelance way of working through our active and influential voice in Government and industry. IPSE aims to be the principal and definitive source of knowledge about freelancing and self-employment in the UK. We work with leading academic institutions and research agencies to provide empirical evidence about evolving market trends. This research supports our work with Government and industry and delivers key market intelligence to help our members with business planning.

Methodology

The results are based on the responses of 1645 freelancers who replied to an online survey between 12 February and 19 February 2021. A total of 95 per cent of respondents were currently self-employed and of these 90 per cent were operating through their own limited company. Overall 19 per cent of self-employed respondents were not currently working for any clients. 

References

1. IPSE & CMME, Getting the Self-Employed on the Property Ladder, February 2021

2. IPSE, Confidence Index Report, Q4 2020

3. Behaviour, Insight and Research Team, Communications Research: Off-payroll working rules (IR35), July 2020.

 

Where next?


 

Visit the IR35 Hub

IR35 Hub

 

Visit the COVID-19 hub

COVID-19 Hub