What do the IR35 changes mean for contractors and freelancers?

The rollout of IR35 into the private sector is due in April 2020. We take a look and the issues, and consider if contractors and businesses should be worried.

What are the concerns for contractors?

Back in 2017 rumours that IR35 would be extended into the private sector was a big concern for contractors. In fact, 48 percent of contractors polled admitted it was their biggest worry, ahead of the 18% worried about competition for contracts. 

So, just what is it about this new tax legislation that’s striking fear into the hearts of contractors?

The results of a recent survey by ContractorUK highlight a few of the key reasons:

• 65 percent of contractors believe their income will decrease following the implementation of IR35 due to higher taxation and National Insurance liabilities.
• 80 percent of contractors believe businesses will not understand how to implement the new rules effectively, creating an additional administrative and compliance burden.
• 62 percent feel that ‘blanket IR35 inclusions’ will be used by businesses to cover their backs even where the reforms should not apply.
• 46 percent say they will wait to see what the ‘initial consequences’ for the contracting market are before deciding whether to leave the industry.

What is the impact of IR35 on the public sector?

To see whether these concerns are legitimate, it makes sense to look at the impact IR35 has had on the public sector following its 2017 introduction. 

1. Projects have been delayed

Fears that projects will be delayed as businesses struggle to apply the IR35 reforms appear to be well-founded. Following the public sector rollout, Transport for London blamed a five-month delay on a ‘significant number’ of vital contractors deserting its operations as a result of IR35 changes. 

2. There’s been a loss of talent

It has been suggested that as many as one-in-five contractors will leave their role for a permanent position after the roll-out due to the adverse impact it will have on their livelihoods. Research by Contractor Calculator revealed a similar pattern after IR35 was introduced in the public sector:

• 37 percent of IT contractors abandoned the public sector following the reforms;
• 63 percent of NHS contractors considered a new career entirely, while 40 percent thought about quitting contracting altogether;
• 25 percent of NHS departments lost at least 50 percent of their flexible workforce.

3. Contractor fees have increased

Faced with bigger tax bills and no employee benefits, it comes as no surprise that contractors will look to recoup their losses by increasing their fees. That, along with the additional employers’ National Insurance contributions, will lead to a significant increase in the costs of UK businesses at a time, post-Brexit, when the government should be doing everything it can to drive economic growth.

*Mike Smith is a director of Company Debt, a leading debt advice and rescue service for small and medium-sized businesses.

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