IR35 – where do we stand now?

Article written by Russell Upton, Director of Key Accounts at Parasol:

The shadows of 2022

“2022 was a challenging year for the umbrella sector, due in large part to issues around IR35 with multiple government U-turns on previously established reforms.

“Many will remember that in September, Kwasi Kwarteng made a surprise announcement in his Mini-Budget that the reforms for the public and private sector – announced in 2017 and 2021 respectively – would be repealed.

“Although there were rumours of changes, this move was very unexpected and sent shockwaves right through the market, with many end hirers and agencies facing the prospect of ripping up recruitment strategies that had been developed over several years in line with the reforms.

“From our perspective, we worked hard on educating partners right across the supply chain on the reforms and impact of a potential U-turn. While on paper, a repeal to the off-payroll reforms would be welcomed by many contractors, as it had the potential to make access to skilled workers even easier (as it was before the reforms), the reality was that a lot of good educational work would have to be revisited unpicked.

“As it turned out, Mr Kwarteng’s Mini Budget was far too radical and triggered a major backlash both from the public and the markets. Jeremy Hunt soon stepped in and reversed almost all of the original announcements, but the damage had already been done.

“For IR35, contractors faced significant uncertainty with unfairly dangled carrots providing a glimmer of hope that there would be a return to former ways of working. After the difficulties of the COVID pandemic for the self-employed community, this move served to undermine government confidence at a time when it finally felt like the dust had started to settle.

Looking ahead to 2023

“As we look ahead into 2023, there’s no question that the UK economy has work to do to shake off the issues that overshadowed much of 2022. However, I think we can be optimistic about the year ahead for those in the contingent workforce.

“All the signs are that the UK economy is heading into a downturn, which historically has seen an uplift in the use of temporary workers. Most of the feedback from our agency partners is that new projects are pushing ahead in 2023 and that we can anticipate a higher volume of workers being placed via an umbrella solution.

“This can be overlaid with current unemployment statistics. Although it has been widely reported that unemployment rates are currently at record lows, many firms are reluctant to increase headcount by employing permanent employees. The flexible workforce is a vital lifeline for the UK economy – in times of boom or bust – so there’s no doubt it will once more be needed to fill gaps in resource and provide knowledge in many sectors.

“Many people across the supply chain still need to be educated on what the original IR35 reforms mean practically, so we’re working hard with contractors and our agency partners to make sure compliance is at the top of the business agenda. In April, it will be two years since the private sector reforms were introduced, but the reality is that there is still work to do to embed what the new rules mean in practice.

Company set-up – umbrella or LTD company?

“Many contractors may be re-evaluating their company setups in light of the events of 2022 and of course, the Autumn Statement, where some significant changes were announced to taxation.

“Having the freedom to select the best alternative company structure is key and we’re providing assistance for our umbrella contractors to highlight the various options available. All workers will be impacted by the recent tax reforms, regardless of their organisational structure, but we’re gearing up for a busy 2023, when the need for qualified contractors and independent contractors will only increase.

“Contractors also want to be confident that the umbrella they chose to partner with is compliant and ethical in their approach to processing a contractor’s pay. Unfortunately, I don’t see the government stepping in to regulate the industry anytime soon, which is disappointing, but means ensuring compliance across the supply chain will be crucial for agencies.

“I would like to see the government come down harder on non-compliant umbrella schemes and for there to be more transparency in the sector. But plans for a single enforcement body were put on ice at the end of 2022, so this does not suggest we will see any real step change any time soon. It’s an area we’ll be watching closely this year.

“Umbrella workers offer an important resource for companies to make use of, but it is definitely not the only option and we maintain our stance on welcoming regulation and tighter rules within the sector.”