What’s the impact of the IR35 extension one year on?

Over 70% of businesses and recruiters have seen a reduction in their limited company Personal Service Company contractor workforce over the last year, according to a new survey which marks a year since IR35 tax legislation was extended to the private sector.

The research by insurer and IR35 specialist, Kingsbridge Contractor Insurance, covers views from more than 1,200 contractors, recruitment businesses and end clients and finds that, despite Brexit and the Covid pandemic, IR35 was seen as the biggest obstacle to hiring contractors over the past 12 months for 50% of end clients surveyed – that is, businesses that work with contractors.

The survey also finds that end clients and recruiters are struggling to place inside of IR35 roles – positions that are considered as ‘employees’ for tax purposes and therefore are likely to be taxed at a higher rate. More than 70% of contractors are looking only for outside IR35 roles over the next six to 12 months despite these accounting for less than 41% of roles on offer. 66% of contractors have said they would not even consider an inside IR35 role.

As a result, nearly half of contractors have considered closing their businesses and 25% have sought work outside the UK.  Kingsbridge Contractor Insurance says the impact for businesses is restricted access to the kind of highly skilled, flexible workforce which is often much in demand after periods of economic crisis and at a time of labour shortages.

Paul Havenhand, CEO of Kingsbridge Contractor Insurance, says: “We have a unique position in the marketplace to be able to see the impact of IR35 from the different perspectives of contractors, recruiters and end clients. The UK economy is being hampered by a severe recruitment crisis, with many businesses struggling to fill vital roles. Contractors, as a highly skilled, flexible resource, could be providing a much-needed interim solution to keep things working and avoid major disruption to UK businesses. But there has been a 11% drop in working contractors in the last twelve months. The complexities of IR35 and perceived risks are putting businesses off. In fact, there has been a 11% drop in working contractors in the last 12 months.”

The research, which is the focus of a new white paper, IR35 – One Year On, reveals that 50% of recruiters feel that end clients were not well prepared for IR35 reform in the private sector and that too many companies are relying on CEST [Check Employment Status for Tax – HMRC’s tool for defining tax status], have adopted misguided stances of blanket bans or are working with umbrella companies through fear of risk.

The study finds that recruitment agencies who reported that their end clients use CEST have seen a larger reduction of limited company contractors engaging in providing services compared to independent employment status tool users:

• 38% of the recruiters, who stated their end clients use CEST have seen a 61% or greater reduction in their contractor pool vs 23% who use independent employment status tools.

Kingsbridge Contractor Insurance says end clients can’t rely on CEST to give a clear inside or outside status determination because it produces indeterminate results 21% of the time.

Andy Vessey, Head of Tax at Kingsbridge Contractor Insurance and leading IR35 expert, says: “HMRC was severely under prepared for the private sector reform, and CEST simply isn’t fit for purpose. However, there are some signs of positive change. There are more U-turns on blanket bans and contractors are optimistic about their future job prospects.”

Kingsbridge Contractor Insurance is calling for a range of measures to be taken to address the problems, including more education so people can understand the implications of IR35 better and reform of CEST so it is fit for purpose and takes Mutuality of Obligation into consideration.

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