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.
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”.
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″.
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”.