Executive Summary
- One in 10 contractors (10%) currently out of work attribute it to the IR35 reforms
- Over half of contractors (55%) have rejected an offer of work in the past 12 months due to it being deemed as 'inside IR35'
- Almost a quarter (24%) plan to seek contracts abroad in the next year
IPSE's IR35 Spotlight report for 2024 reveals that over one in five (21%) are not currently working, with half of them attributing this to the impact of reforms to IR35 tax rules.
Meanwhile, over half of contractors (55%) said they had rejected an offer of work in the past 12 months due to it being deemed ‘inside IR35’ by the client whilst 24 per cent said they intend to seek contracts overseas this year to escape the rules.
Similarly, the research has again exposed the fact that some clients are falling short of their legal obligations to contractors, particuarly when it comes to the issuance of a Statement Determination Statement (SDS).
Now in its second year, the annual research shows that changes to the IR35 rules continue to impact hiring for skilled contract workers after being rolled out in the private sector in April 2021.
Introduction
The 2017 and 2021 off payroll working reforms to IR35 introduced significant changes to the public and private sectors respectively, which IPSE research has subsequently revealed to have caused significant challenges for both contractors and clients alike.1
The research revealed that contractors have changed how they tend to operate whilst clients have also changed how they engage flexible expertise, often favouring an intermediary such as an umbrella company or in many cases, implementing a blanket ban or series of blanket assessments on all their contractors.2
Launched last year, IPSE’s inaugural annual IR35 Spotlight report for 2023 highlighted that one in 10 contractors (10%) were out of work as a direct result of the IR35 reforms. Similarly, it also revealed that more than half of contractors (53%) walked away from opportunities that were inside IR35 in the previous 12 months whilst 22 per cent were planning to seek contracts abroad as a result of IR35 – delivering a knowledge and skills boost to competitor economies at the expense of UK PLC.3
This report will follow-up on the report from 2023 and track key metrics related to IR35, including the ways contractors work, their client’s approach to the rules and the success rate of appeals against client determinations.
In order to track the engagements of contractors and the behaviour of clients when navigating the IR35 rules, we asked over 1,300 respondents a series of questions such as how the client determined the IR35 status of the engagement, whether a Status Determination Statement (SDS) had been provided, and how the contractor now operates.
To understand the current working status of contractors, we asked respondents whether they are currently working and for those not currently working, the reasons behind this.
Overall, 79 per cent of contractors reported that they are currently working, whilst just 21 per cent of respondents were not. Interestingly, the number not currently working has seen a small increase compared to 2023, where just 18 per cent of respondents were not.
When looking at the breakdown by age, 86 per cent of respondents aged between 16 and 49 years old indicated that they are currently working compared to 78 per cent of those aged 50 years old and above.
Notably, over half of those not currently working (50%) reported that this was due to the impact of IR35 reforms in the private sector.
A further 52 per cent indicated that they are currently in-between roles and have been in work over the last 12 months which represents an increase on our findings from 2023, where just 37 per cent were in-between roles.
Other reasons identified by those not currently working included government policy towards the self-employed (22%) and not being incentivised to return to the labour market (18%).
Interestingly, 12 per cent reported that they are currently retired but would be open to returning to the labour market, whilst another nine per cent were retired and had no plans to return.
Over the past 12 months, contractors have worked on an average of two engagements which exactly matches our findings from last year’s report.
The overwhelming majority of engagements (81%) have been with private sector clients, whereas 19 per cent of engagements were with clients based in the public sector. This closely aligns with our findings from 2023, where 82 per cent of engagements were with private sector clients and 18 per cent with clients in the public sector.
Looking at the IR35 status of engagements for non-exempt clients (where the off payroll working rules apply and the client has to make an IR35 determination) reveals that 16 per cent of all engagements in the private sector were determined as inside IR35, with 84 per cent determined as outside IR35. This represents an increase on our findings from 2023, where 20 per cent of engagements were inside IR35 and 80 per cent were outside IR35.
A similar picture emerges when looking at the IR35 status of engagements in the public sector. Over the last 12 months, 25 per cent of engagements were determined as inside IR35 whilst 75 per cent were determined as outside IR35.
Notably, 55 per cent of contractors indicated that they have rejected an offer of work in the last 12 months solely because the client deemed the engagement to be inside IR35. This continues the trend reported by contractors last year, with 53 per cent indicating this in 2023.
A further 45 per cent reported that they had not rejected an offer of work solely due to the engagement being deemed inside IR35.
Working with clients exempt from the IR35 rules
Interestingly, contractors reported that 17 per cent of all engagements were with a client that is legally defined as a small business and therefore exempt from the requirement to assess the IR35 status of an engagement. This compares to 28 per cent of contractors from our report last year, indicating a decrease in the number of contractors seeking engagements with clients subject to the small business exemption since last year.
A further 10 per cent of all engagements were with clients based wholly overseas and therefore also exempt from this requirement but this also represents a decrease compared to 2023, where 18 per cent of contractors were with clients based wholly overseas.
Like last year, we again asked contractors about how they operate in their current engagement or if operating on multiple roles, how they operate on the engagement that takes up most of their time. From this, we are able to ascertain any changes to how contractors tend to operate across the last 12 months.
Three-fifths of contractors (60%) reported that they are currently being paid gross through their own limited company for their current engagement. This closely aligns with our findings from 2023, where 62 per cent of contractors also reported that they were currently working through their own limited company.
Almost three in ten (27%) reported that they are currently operating through an umbrella company, which represents a slight fall compared to 2023 (30%).
Five per cent of contractors indicated that they are on an agency payroll whilst a further one per cent indicated that they are on a client’s payroll.
Current engagements for those contracting
Percentages do not add up to 100% because respondents were able to select multiple responses
As of 6 April 2021, medium and large-sized businesses have been legally required to carry out the IR35 status determination and provide a Status Determination Statement (SDS) to all contractors.4
A SDS is usually a document or email that must be provided to the contractor for every contract that is agreed and based on the outcome of an IR35 assessment.
Despite these being legal requirements for medium and large-sized businesses, over three-fifths of contractors (63%) reported that their client had not provided them with a SDS. This closely aligns with our findings from 2023, where 60 per cent of contractors had not been provided with a SDS.
Just 37 per cent of contractors indicated that they had received a SDS for their current engagement.
For the contractors who were provided with an SDS, as legally required, 82 per cent of these agreed with the IR35 status determination which exactly matches our findings from last year.
On the other hand, 18 per cent of respondents now report that they disagreed with their client's IR35 status determination.
Of those who disagreed with their client's IR35 status determination, over three in five contractors (61%) challenged it, whilst 39 per cent did not challenge it, despite disagreeing with the assessment.
Notably, the overwhelming majority (85%) of those who challenged their status determination reported that there had been no change as a result of the challenge. A further six per cent indicated that their challenge was successful and had their IR35 status changed whilst another nine per cent were still awaiting the outcome of this challenge.
In comparison, previous IPSE research from 2021 and in the immediate aftermath to the implementation of the reforms revealed that 17 per cent had successfully changed their IR35 determination following appeal.
In order to track the determination of IR35 status over the past year and the long-term impact of IR35 on the contracting sector, we asked contractors about the IR35 status of their current engagement or if operating on multiple roles, the IR35 status of the engagement that takes up most of their time.
Looking at the IR35 status of contractors' current engagement reveals that 47 per cent of all engagements were deemed as outside IR35 (compared to 45% in 2023) whilst 29 per cent were deemed as inside IR35 (compared to 29% in 2023).
A further six per cent of all respondents were currently working for an end-client that is a small business and therefore exempt from IR35 legislation whereas six per cent were instead working for an end-client that is wholly overseas and also exempt from IR35 legislation.
Five per cent of contractors indicated that the end-client had not discussed IR35 with them. This could be because their client is exempt from the rules, or more concerningly, these clients may be unaware of their IR35 requirements or flouting their legal responsibilities to inform their contractors of an IR35 determination.
Contractors are now slightly less likely to be currently working for an end-client exempt from IR35 as the client is a small company or based overseas (11% compared to 14% in 2023).
Overall, the research now indicates that whilst clients have perhaps eased their initial blanket approach to assessments and blanket bans to those working through a limited company in the aftermath of the rule changes in 2021, the market for outside and inside IR35 roles has remained relatively rigid in the past 12 months.
To review how clients’ determination process has changed in the previous 12 months, we asked contractors how their client for their current engagement has determined their IR35 status.
Interestingly, almost two-fifths of contractors (39%) indicated that their client used the CEST (Check Employment Status for Tax) tool to determine the IR35 status of their current engagement. For comparison, 37 per cent of contractors indicated this was the case in 2023.
A further 32 per cent reported that their client had used a third-party company to assess their IR35 status which also closely aligns with the findings from last year (34%).
Just over one in ten contractors (12%) reported that their client used a tool or piece of software other than the CEST tool to determine the IR35 status of their engagement and this exactly matches the results from our survey carried out in 2023.
Concerningly, a further 13 per cent of respondents understand that their client has determined all engagements to be inside IR35 – a blanket assessment. This represents a very small increase from 2023, where 11 per cent of contractors indicated this was the case and suggests that the prevalence of blanket assessments by clients – a form of non-compliance with the IR35 rules themselves – has only increased in the last 12 months.
Another six per cent of contractors reported that their client made the IR35 assessment themselves without using any tools or software. This compares to nine per cent in 2023 and indicates that clients are now less likely to navigate the IR35 rules by themselves; potentially linked to HMRC’s increased compliance activity in this area.
A further five per cent indicated that their contract was advertised as being inside IR35 whilst two per cent of respondents indicated that their client insisted they work on payroll without assessing the IR35 status of the engagement – a blanket ban.
How did your client determine your IR35 status?
Percentages do not add up to 100% because respondents were able to select multiple responses
Since the introduction of the IR35 reforms in the private sector, IPSE research has revealed an increased use of umbrella companies by contractors. In order to measure the extent of this impact, we asked the contractors that currently operate through an umbrella company (27%) about their overall level of satisfaction.
Closely aligning with our research findings from 2023, almost seven in ten contractors that are operating through an umbrella company (68%) now report that they are either somewhat or very dissatisfied about working in this way - indicating that contractors remain overwhelmingly dissatisfied about having to use an umbrella company as a result of the IR35 reforms.
For comparison, 70 per cent of umbrella company workers were either somewhat or very dissatisfied about working through an umbrella company last year.
Just 13 per cent of those operating through an umbrella company indicated that they were either somewhat or very satisfied about working through an umbrella company.
A further 18 per cent were neutral about the fact that they operate through an umbrella company.
One further consequence of the IR35 reforms – as identified in previous IPSE research – has been the closure of many viable limited companies that contractors previously used to operate for outside IR35 roles. To track this particular impact, we asked contractors whether they have closed their limited company due to the implementation of the reforms.
Notably, 39 per cent of contractors reported that they have closed their limited company due to the introduction of IR35 reforms in the private sector. Indeed, we know from previous IPSE research that many of these contractors have not returned to the labour market since closing their companies.
Just over half of all respondents (56%) reported that they have not closed their limited company due to the IR35 reforms in the private sector.
A further five per cent indicated that they have never operated though a limited company.
An indemnity clause is where contractors are asked or required to accept a contractual condition that they will indemnify fee-payers against HMRC tax investigations.
Despite not knowing if these clauses are legally enforceable, IPSE is aware that clients are increasingly using such clauses for outside IR35 engagements to cover against any retrospective HMRC investigation relating to IR35.
To better understand the prevalence of indemnity clauses in contracting, we asked contractors in 2023 whether one of their clients has ever asked or required them to agree to an indemnity clause as a contractual condition for an outside IR35 engagement. Notably, just under a quarter of contractors (24%) reported last year that they had been asked or were required to agree to an indemnity clause.
This year, 23 per cent of contractors report that they have been asked or were required to agree to an indemnity clause.
On the other hand, 67 per cent of contractors had not been asked or required to accept such a clause, whilst nine per cent were unsure.
Of those that had been asked or required to accept an indemnity clause (23%), 56 per cent simply accepted the indemnity clause and signed the contract.
Conversely, 26 per cent indicated that they successfully negotiated the indemnity clause out of their contract. This represents an increase from 2023, where just 18 per cent had successfully negotiated it out and indicates that contractors are increasingly finding success in negotiating out these contractual terms.
We also asked contractors how they intend to operate over the next 12 months in order to understand the long-term impact of the IR35 reforms in the private sector.
Over three-fifths of contractors (63%) reported that they intend to continue to work as a contractor only if they can find contracts that are deemed to be outside IR35. This closely aligns with our findings from 2023, where 62 per cent of contractors indicated this was their intention.
Interestingly, 25 per cent indicated that they intend to only work as a contractor for small clients who are exempt from making IR35 determinations which represents a small decrease on our report from 2023 (29%).
In addition, 24 per cent of contractors intend to work as a contractor regardless of their IR35 status.
Notably, almost a quarter of contractors (24%) intend to seek contracts abroad – reducing the pool of flexible talent available to UK businesses and boosting overseas economies at the expense of UK economic growth. This is particularly concerning given that 22 per cent of contractors indicated that they would be seeking contacts abroad in the past 12 months in our survey from last year.
Just 12 per cent of contractors intend to work via umbrella companies whilst 10 per cent intend to work as an employee and another six per cent intend to retire.
How contractors intend to operate in the next 12 months
Percentages do not add up to 100% because respondents were able to select multiple responses
A new metric for 2024, we’ve now introduced a question on how confident contractors feel in securing outside IR35 contracts in the next 12 months to measure overall confidence in the market amongst contractors.
Overall, when we asked contractors that were intending to only secure outside IR35 contracts in the next 12 months how confident they were about securing these engagements compared to the previous 12 months, just 12 per cent were more confident.
Notably, half of all contractors (50%) were less confident in securing outside IR35 roles in the next 12 months whilst 38 per cent indicated they were as confident as they were in the previous year.
Concerningly, 27 per cent indicated that they were a lot less confident in securing these roles compared to the previous 12 months.
With many of the key metrics largely following our findings from 2023, the research shows that the off payroll working rules are continuing to have a significant impact on the sector; ultimately keeping thousands of highly skilled individuals out of work.
Similarly, the findings indicate that it remains particularly challenging to navigate the rules for both contractors and clients alike. Contractors in the market for outside IR35 roles are now less confident in securing these roles in the next 12 months whilst many are now looking to head abroad; depriving UK businesses of this vital flexible expertise.
With the government keen to tackle the UK's growing economically inactive population, the government should be looking at these IR35 reforms and the barriers to labour market participation it is ultimately contributing to. In the short-term, it should commission a review into the impact of IR35, encompassing the entire supply chain, reviewing the actions of clients, agencies and umbrellas alike - including the neglect of SDS issuance - and be accompanied by robust measures to revive the UK's contracting sector.