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HMRC’s IR35 research ‘sharply contradicts’ reality of reform

Government’s IR35 research branded ‘overly optimistic’ by experts

The report, titled ‘Effects of the off-payroll working reforms on agencies’, by IFF on behalf of HMRC, explores the impact IR35 reform in the public sector in 2017 had on recruitment agencies. 

However, IFF interviewed just 34 recruitment agencies between November 2020 and January 2021, with only 12 of those working with clients in the public sector.

According to the report, “many [agencies] reported that the number of contractors they have on their books […] remained stable or increased since the introduction” of public sector reform. 

It also claimed that any changes experienced by organisations were “not always a direct result” of the changes and increases were often because of wider business developments. And where the number of contractors decreased, it said was largely due to “external factors” such as Brexit and the COVID-19 crisis. 

Contractors felt reforms were a ‘direct attack’ on them

The report does note that “some agencies linked the decrease in the number of contractors […] directly to the 2017 reform to off-payroll working rules”. Where this was the case, agencies cited a “combination of a reduction in demand […] and in supply” as a key reason.

One interviewee told researchers that IR35 reform “affected our capability to supply healthcare staff to the NHS… [Contractors] didn’t want the extra taxation; they didn’t want the bother and a lot of the people who worked through their limited companies felt it was a direct attack on them and their ability to earn money. A lot of them responded by not working for agencies”.

The IFF went on to state that because of IR35 changes, some contractors had “shifted away” from using personal service companies (PSCs), instead working on the payroll of agencies and umbrella companies. Others, meanwhile, increased their rates to cover the cost of being taxed at source.

The report also touches upon the use of HMRC’s Check Employment Status for Tax (CEST) tool, which was described by some agencies as “too binary” and “not tailored to all circumstances”.

HMRC-commissioned IR35 research is ‘limited’

The study discussed the upcoming effects of reform in the private sector too, noting that “some agencies reported early signs of contractor numbers decreasing”, which is caused by a “reduction” in the use of PSCs.

In response to the publication of the report, Rebecca Seeley Harris, employment lawyer and IR35 expert, told Contractor Weekly:

“It’s encouraging that HMRC has actually conducted and produced some research, as there was doubt that it would. The research, however, only interviewed 34 agencies, so it is limited in its scope. It also seemed overly optimistic in blaming other factors, for example, wider business development or Covid for the increase or decrease in PSC numbers. 

“The research did note that there has been an increase of contractors moving to umbrella companies and this is a worrying trend bearing in mind the lack of regulation in that sector and the issues with holiday pay”.

Andy Chamberlain, Director of Policy at IPSE, said the findings “sharply contradicted” the trade association’s own findings:

“In the public sector, our research showed three quarters of hiring managers found it harder to engage contractors and over half of hiring organisations had lost skilled contractors – both directly because of the changes to IR35″.

Government urged to rethink and see the ‘warning signs’

Research by IPSE, in partnership with the CIPD, conducted in 2018, found that half (51%) of hiring managers had lost skilled contractors as a direct result of the IR35 reforms and 71 per cent said they were struggling to hold on to their independent workers.

The insight also revealed that 40 per cent of contractors working in the public sector had witnessed projects being delayed and costs rising because of incoming reform. This figure was higher for hiring managers (52%), who also reported projects being cancelled.

Eight in ten hiring managers also said at the time that approaching IR35 reform had caused a “substantial increase in the workload involved in engaging and paying contractors”.

IPSE’s Chamberlain added: “In terms of the imminent private sector changes, we can see the drastic harm the changes will do even before they come into effect. We recently conducted research showing that half (50%) of freelancers are planning to stop contracting in the UK after the changes come into effect – because they will seek work abroad, stop working altogether, seek employment or retire.

“In terms of clients, too, there are loud alarm bells: nearly a quarter of contractors told us their clients still don’t know what to do about the changes, while another quarter said their clients are planning to blanket-assess all contractors as ‘inside IR35.’

“A fifth of clients have said they will only engage contractors through umbrella companies and one in ten have even said they will stop using contractors altogether.

“Despite the apparently broadly positive findings of the government’s research, across the sector, there are serious warning signs about the extreme damage these changes will do and we continue to urge the government to rethink this move”.

By Contractor Weekly

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19 thoughts on “HMRC’s IR35 research ‘sharply contradicts’ reality of reform”

  1. Gary Andrews

    Bravo Contractor Weekly. It’s good you’re not presenting the false balance of industry experts v HMRC marketing hustlers here.

    If the revenue’s “facts” check out as lies they shouldn’t get their disingenuous view represented within an article.

    Now please curtail your traditional British understatement and call out the IR35 sh*tshow for what it is.

  2. Bradley

    The current regime despises contractors and small business.
    What have we ever done to deserve retrospective taxation, blanket IR35 blacklisting, no pandemic support, no services deal in Brexit FTA, freedom of movement gone and tax hikes to cover the mismanagement of others?

    We only built your infrastructure, staffed your hospitals and made you the magic potions that saved your botched premiership stout boy.
    Professionalism is persecuted in Brexit Britain while clowns are celebrated and rewarded.

    I for one won’t be building your ludicrous tunnel or repurposing your $500m worth of space junk the Indians duped you with. There will be plenty of overpriced swindlers queuing up for those gigs. Pub landlords and crisp manufacturers no doubt, all ready to kiss the ring and worship the creepy new symbols of state.

  3. Andrew

    An IT contractor on £600/day pays more tax than a permie on £65k. A lot more.

    IR35 kills IT contracting => Clients take on permies instead.

    HMRC gets LESS tax.

    While killing off the flexible workforce that the UK has.

    Stiffling economic growth.

    HMRC gets even LESS tax.

  4. Ex Contractor

    Contractors pay Corporation Tax, Personal Income Tax, VAT etc. HMRC will certainly lose revenues from those sources. Many contractors will either retire or work on those contracts that are outside IR35.

    • Andrew Harrison

      I think it is better to say Contractors administer VAT. The daily rate is a cost to the client, the plus VAT part comes from the client’s pot of VAT already owed to HMRC. When the VAT is paid by the contractor to HMRC it is just passing on the money from the client’s pot of VAT debt. Always struck me as “give unto Caesar that which is Caesar’s” – it was never really the contractor’s money.

      • Gary Andrews

        Not always. VAT makes the contractors fee 20% higher so therefore they can’t charge as much.

        If the client does not (or doesn’t fully) get their money from VATable sales then the inc. VAT cost is what clients pay.

        I’ve had clients who can’t reclaim VAT where I have had to charge a lower rate, and yes this has been part of the negotiation. I am effectively subsidising the VAT from my rate.

        VAT makes a huge difference, to pretend it’s irrelevant is simply naive.

  5. Daz

    I’m getting agencies contact me for work saying the role is inside IR35 but then I find out its a 80 mile drive to the office. Before it wouldn’t have been an issue, now, what’s the point ? No expenses, no overnights away if I work until 10pm to get the job done in time. No No No, I’ll take the contract round the corner for a much lower rate thanks. Another thing, employers NI, apprentiships levy ??? We are now supposed to be employees now aren’t we?, screwed at both ends, cheers UK HMRC.

  6. Foxy

    Almost all companies supplying contract labor to the Oil & Gas industry have blanket banned contractors.
    This will either force contractors to take a 10-20% pay cut along with increased tax with no benefits or leave the contract,sector or industry all together.
    The O&G sector was already struggling with a skills shortage and a mass exodus to renewable’s.

  7. Geoff

    It clearly is an attack on contracting and the fact that many are stopping contracting and going on payroll will be seen as justification for HMRC.
    The attack does not stop with IR35 though; MTD requires all contractors to computerise their accounting and send in 5 tax returns a year instead of 1. The latest “consultation” is that tax will be paid in instalments, much earlier than at present, presumably based on the interim quarterly tax returns. That is despite explicit assurances when MTD was being introduced that it would not lead to earlier tax payments. HMRC and Government do not seem to realise that people have to work to pay tax and ping endless barriers in the way resul in less tax. I have said sod it and retired.

    • Biggus Dickus

      It shows the quality of the cretins who have been running the country for so long. They are going to kills business stone dead. Who in their right mind wants to spend all their time doing non-productive paperwork for HMRC – it’s getting more and more onerous and if you get it wrong at any point they fine you.

      Sure, we know they hate contractors, they’ll just fly more Indians in to replace us but they’re going to put anybody off from starting any kind of business. You’ll end up doing a daily report to HMRC at this rate on what you earnt and what you spent. Only way is to opt out of it all.

  8. Biggus Dickus

    I left contracting after 25 years. Twenty years of b*llocks, wondering if the bottom dwellers at HMRC are going to come park their tanks on your lawn for the next three years while half the country is a net drain on the other half.

    First permie job since I was a youngster, lovely having paid holidays and not having to deal with agents and accountants, keep books and all the other rubbish you get with contracting. No having to work with people who barely speak English either.

    I’m paying almost no tax and NI at all, £40,000 a year into my SIPP and taking a small salary. They were getting way more when I was contracting guess that back fired on them!

  9. Nigel

    It is perfectly obvious that HMRC are prepared to cut their nose off to spite their face. They ate prepared to ignore the terrible injustices involved in umbrella companies to allow the IR35 rule to be seen as workable. This sought of double standard hypocrisy can only end in disaster.

  10. XY

    Others have covered most of the issues.

    When contractors are “presented” by so-cacalled “experts” who all have a vested interest in IR35 continuing, little woinder that we get nowhere. Even IPSE/PCG appear to be either incompetent or deliberately making things worse – they realise that most of their membership only joined for IR35 reasons. Well, now they will be leaving, PCG, no need for you if they’re through a brolly, is there?

    Remember all the terrible decisions? When they found a few years ago that HMRC had only conducted 11 IR35 investigations in a year, instead of quietly noting that, they shouted about it, pretending it was a reason for repeal – and of course HMRC upped the investigations.

    Then they asked for “certainty”. We predicted that the certainty would be “you’re all caught”. And we got it – we’re all caught.

    Then we get them and a bunch of people who are contract reviewers representing contractoirs on the IR35 forum. More people with a vested interest in IR35 remaining.

    Representation by “useful idiots” is not representation at all.

    I’ll be looking for a non-UK contract. Or semi-retiring while being available for an outside IR35 one. Permie IT not for me – too many businesses just don’t understand how to do IT properly.

    But contractors – you need to form an independent body that can do better than the current drop of “representatives”.

    • xy

      Some annoying typos in the above – little time, typed too fast – “presented” in second para should of course be “represented”.

  11. IT Contractor

    Contracting is dead. Vast majority of clients are asking to work inside IR35, which would involve Umbrella/agencies. Hardly a smooth process. Most contractors are either semi retiring or taking up outside IR35 roles.

  12. Gig worker

    Totally discriminatory. Clients treat contractors from Offshore companies working in the UK differently. They are outside of IR35 despite the fact sone contractors continue to work on projects more than a year or so(like a permanent staff)

  13. Rishi Sunak

    Hello peasants

    Time for you to all go get a nice permanent job – you get paid holiday you know and a peasant’s salary to go with it.

    As you’ll know I recently announced a fast track visa scheme so we can allow even more Indians in. They will be doing the highly paid work from now on. My father-in-law is head of Infosys, did you know that? We’re going to coin it in together, ka f*cking ching!

    We’ve seen how you all carry on voting for us even when we give your jobs away. I bet most of you vote LibLabCon at the next election. Carry on peasants.

    Hahahahahahahahahahaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaa

  14. The T

    3 Irritations with IR35

    1) The obsession with providing a Substitute. Who has ever had to provide a Substitute since the advent of Domestic Broadband? HMRC have replaced sensible questions in the original CEST tool such as:

    Do you operate under a Ltd Company
    Does the Ltd Company have its own Bank Account
    Does the Ltd Company operate a Payroll Scheme

    Replaced with can you provide a Substitute and if so does the Client agree to accept any Substitute that you offer, assuming that the Substitute passes conventional vetting. Since Broadband you would really only provide a Substitute if you had a Stroke or something. If you were in a car crash and broke both legs you would simply work from home. In time the Substitute clause will and should be classified along side asking a young lady if she planned to become pregnant.

    Also the Substitute questions are non-Questions as the Client can simply terminate a Contract within 5 Days and that is their remedy for rejection of a Substitute. The CEST tool avoids the whole issue of Notice Periods.

    2) The Client is under no legal obligation to justify the rejection of, nor accept a bone fide lOutside of IR35 CEST lresult. This will prove illegal in due course. What legal precedent is there for an unrelated company, (Not a Shareholder, Not an Officer, & No Voting Rights) to take responsibility for the Tax Affairs of the Unrelated Company.

    3) HMRC have not stated whether they will initiate proceedings against the Contractor first or the Client first or the Agent first. This is diluting the validity of IR35 Insurance taken out by the Contractor because the Client understandably wants to know that they are Indemnified by the IR35 Insurance policy of the Contractor. The Contractor’s IR35 Insurance Policy provides legal insurance for the Contractor only. This is causing the uncertainty.

    None of these points have been tested in the Public Sector and as usual they are now being exposed by the Private Sector.

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