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Firms’ non-compliant approach to IR35 reform revealed

Nearly one in two contractors yet to receive Status Determination Statement (SDS), while half may challenge client’s IR35 decision

A new survey by IR35 expert, Qdos, has revealed that only 56 per cent of contractors have received an SDS from their client, despite this document outlining an IR35 decision being a legal requirement. The poll, of 1,846 contractors, is one of the first to explore how contractors and businesses are managing recently enforced IR35 reform. 

Since the roll out of the controversial changes on 6 April, medium to large-sized businesses engaging contractors have been responsible for determining IR35 status. The tax liability has also shifted, from the contractor to the fee-paying party. 

More than a third plan to challenge IR35 determinations

The survey found that 65 per cent of contractors had been determined inside IR35 by their hiring companies, compared to 35 per cent who were assessed as outside IR35. Around 4 in 10 (39%) of contractors said they will challenge their client’s IR35 decision, with a further 11 per cent thinking about disputing it.

Seb Maley, CEO at Qdos, said: “Reform has landed but that doesn’t mean it’s job done for businesses. […] Firms need to remember, preparing for IR35 reform was phase one. Phase two – which we have now entered – is ensuring compliance going forward.

“I’m not surprised that there’s clearly still work to be done and contractors aren’t convinced that reform is manageable. But even so, whichever way you look at it, contracting isn’t dead – nor will IR35 reform spell the end to working in this way.” 

IR35 reform is ‘deeply damaging’

Andy Chamberlain, Director of Policy at self-employment trade body, IPSE, also commented: “It is very troubling – although perhaps not surprising – that over half (56%) of contractors have still not received an SDS from their client. 

“This is yet more evidence that not only are the IR35 changes deeply damaging to the self-employed sector; they have also been introduced at the worst-possible time. Client businesses and contractors have been hit hard by the pandemic, and many clearly are not in a position to deal with the IR35 changes.”

Nearly two-thirds encouraged to use umbrella companies

Qdos’ study went on to highlight how nearly two-thirds (64%) of contractors said they had been told they could work via an umbrella company by their client. 

The umbrella industry has come under increased scrutiny lately over malpractice and exploiting the freelance workforce, with industry experts urgently calling on the government to intervene and regulate what has been referred to as the ‘wild west’.

Chamberlain said: “What is also deeply concerning in this research is the approach of those businesses who have responded to the changes: pushing a high proportion of contractors into working through umbrella companies. 

“The lack of regulation in this area means that all too many of them employ sharp practices that undermine contractors and rights. Government must urgently step in on the disarray in the wake of IR35.”

By Contractor Weekly

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11 thoughts on “Firms’ non-compliant approach to IR35 reform revealed”

  1. Gary Andrews

    Has anyone in the Treasury considered the effects of IR35 on the workforce I wonder? Let’s look at some pros & cons.

    Cons
    —-
    1. Huge amounts of unproductive admin time wasted for UK workers, clients, accountants and HMRC (£billions annually?).
    2. Blanket inside IR35 judgements across whole sectors, most notably finance which is currently decamping en mass to Europe.
    3. Large amounts of highly skilled contractors pushed into permanent employment resulting in:
    a. Record small business closures
    b. Lower salaries x lower percentage tax rake = far less tax for the treasury
    c. A non-flexible workforce
    d. Fewer working man hours
    4. Skilled contractor exodus from the market. Abroad or into retirement/semi-retirement.
    5. Skills shortage partially filled by overseas workers:
    a. Expensive offshore firms typically charge ~3 times the rate of domestic contractors
    b. Offshore firms pay little or no tax to the treasury
    c. Offshore firms take over control of domestic infrastructure and acquire ownership of confidential data
    d. Cheap onshore immigrants displace domestic workers and are politically unpalatable

    Pros
    —-
    Suggestions anyone? I can’t think of any unless I was running an overseas offshoring business like Infosys.

    • James Lafferty

      Summarised perfectly…if only people who thought up this legislation had considered these very same points. But these points aside, how can an individual with no statutory sick pay, pension, and with a single weeks notice clause in a contract be deemed the same as a permanent employee? Even further, why this individual also has to pay employers NI is beyond me….all makes for a very inflexible flexible work force

      • Red

        so you work through an umbrella company, everything comes out of the money you are expecting as your rate. So this is false employment because no one who is genuinely employed pays employer national insurance. The firm you work for pays it they also benefit with the pay role as they can offset this against their corporation tax en though they haven’t employed you and not paid it themselves. Total con and it needs stopping either you are employed or not.

    • Andy

      This is spot on – I have also struggled to understand the winners; there are just a bunch of losers, bar offshore companies. As I understand it, offshore has to be considered by the big banks for all former contract roles.

      The former contractors lose (low paying perm employment, retirement or migration), the clients lose (no more flexible workforce + risk of lawsuits for incorrect IR35 determination/employment rights claims), the UK loses (jobs being pushed offshore, tax take lower from far fewer roles & ex-highly paid contractors now mid-paid employees or fighting for low rate contracts).

      The overall tax take is certain to fall. But, unfortunately, the company closures and loss of tax revenue will be hidden by and blamed on Covid.

      • Alan

        And do HMRC care when they then try and investigate? I don’t think so, its all about income to the Treasury with no thought to the impact of contractors. Moreover how can contractors “force” clients to provide SDS documentation?

        • Red

          Well you can see that over time. sacrifice your own people, Deindustrialized the whole country, no vision for the future, squander north sea oil and gas revenue, 100 plus years of coal still in the ground but we would rather import it and be dependant on other countries. Have things manufactured overseas and then expect people to buy it.
          Put people out of work , make the population dependant on the state. Tax upon tax , rinsing a shilling out of you at every turn. wasting trillions of dollars on electric and autonomous vehicles. Change from global warming to climate change so you cant deny it, but those who know are not denying it its called weather and it has always happened and always will. Don’t look to any government for help on anything they only want your vote so they can stay in power. Remember the only person in this world who cares about you is you.

  2. Jim

    Winners: Accenture, Wipro, Infosys etc etc

  3. David

    Not sure I agree with all the listed points although the general theme is sound.

    The whole purpose of the legislation change was to bring in more revenue to the government, so even when a limited company contract rate is converted into a permanent salary much lower rate, depending on the numbers of course, the ultimate tax take (Income Tax & NI less foregone Corporation Tax) will still usually be higher.

    But many of us have not gone into the permanent route, but been pushed into the Umbrella Company route or are deemed inside IR35. There the flexibility to the client company remains the same, the contract rate remains the same, but the tax take to the Treasury increases enormously. It is here that the Government has really benefitted.

    I for one remain convinced that the overall tax take will indeed rise, albeit not by as much as was projected.

    Whether that rise is sufficient to offset the huge ill will generated is another matter and one for the politicians, but judging by how freelancers were ignored by the Treasury during the pandemic, I suspect the Government doesn’t care.

    • Gary Andrews

      Admittedly some issues are grey but you might be the only one outside of the Treasury convinced that the overall tax take will rise.

      It would require 100% of pre-existing contractors to stop using Ltd companies and instead join umbrellas to continue working as before. It also assumes that the umbrellas voluntary operate exactly as HMRC wants them to (without any regulation). It additionally assumes the umbrellas pay over all (HMRC’s view of the) required taxes. None of this is going happen in any reality.

      The contract-to-perm calculation is more complex and you might even get a perm to pay more tax if you compare best to worst examples where rate = salary. Real world examples however, will always have the total tax rake to be much less for the perm role. It’s very clear and stale on this forum.

      I know colleagues have gone down this route. I’ve been offered perm jobs on previous contracts myself. We’ve all done the calculations the tax take for the Treasury is much lower, not just a few percent but massively even after splitting hairs over issues of NI, VAT, weeks of work etc. it’s not even close.

      Increased tax take can’t be the motivation for the Treasury, so what is?

      • Millennium rate

        Regarding tax take, the numbers might have worked if they hadn’t introduced the small employers NI allowance. Resulting in the mini umbrella company industrial tax “avoidance” schemes.
        I’d add a further con, my main client has taken steps to put our contract outside IR35, as a result they are paying a lower rate than when I provided consultancy services to them a decade ago.

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