90% of firms forced to increase contractor rates following IR35 reform

Businesses engaging contractors face significant cost increases since IR35 reform

Following IR35 reform in the private sector, nearly nine in 10 UK businesses engaging contractors have been forced to increase their rates to attract talent, a study has found. 

The report by Brookson Legal, titled Reassessing IR35: The unspoken opportunity for growth, puts the rise in rates down to IR35 reform in the private sector, which came into effect in April 2021.

It found that of those firms that had increased their rates for contractors, three-quarters (75%) were forced to raise this by more than 10 per cent.

According to the research, 77 per cent of end clients now find engaging contractors difficult, with half saying it is challenging (48%) and 29 per cent reporting it to be very challenging.

Most companies plan to use contractors in next 18 months

This trend looks set to continue into 2022, with 90 per cent of companies claiming they plan to extend their use of contractors over the next 18 months in order to support growth.

Brookson Legal firm said it initially thought that the fear of HMRC fines was driving business behaviour in relation to IR35.

However, the study revealed that commercial risks, such as contractor costs (53%), talent attraction (42%) and project delays (42%) were seen as the bigger risks of using a ‘bad IR35 solution’, compared to resulting tax bills for non compliance (31%).

Matt Fryer, head of legal services at Brookson Legal, said: “For businesses that rely on the contractor workforce to deliver projects on time and to budget, access to a talented flexible workforce is vital to growth.

Compliant IR35 solutions help attract talent 

“With job vacancies reaching an all-time high, presenting an attractive, compliant and competitive IR35 offer to talent is the best way to regain some control in an uncertain environment.” 

Recently reformed IR35 means that the responsibility for determining IR35 status has shifted from the contractor to medium and large businesses engaging them. Fryer highlighted that it’s important to understand where responsibility for this legislation now lies within the business.

In more than half the businesses surveyed (56%), the CEO took this responsibility and the board in a quarter (24%). For the remaining 20 per cent of firms, the IR35 strategy was delegated to other departments.

Businesses urged to avoid ‘quick-fix’ solutions for IR35 reform 

But what is more concerning, Fryer said, was how the “data suggests that many organisations may feel a false sense of confidence in their approach to IR35 compliance.”

Nearly 90 per cent of businesses believe their approach to the reform meets HMRC’s guidelines. However almost half (47%) have used the tax authority’s CEST tool to make IR35 determinations, 42 per cent have used another automated online tool and a third have used an agency (31%) or contractor assessments (35%).

Fryer added: “These approaches carry both the risk of tax liabilities from HMRC and can create barriers to growth if not used correctly, which will likely increase the cost of resourcing even further. For businesses that implemented these quick-fix solutions, now is the time to act and put in place a robust IR35 solution ahead of HMRC’s soft landing period ending in April 2022.

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