IR35 has already had a significant effect on contractors in the Construction sector, contributing to a 10% fall in the number of self-employed workers, according to research conducted by IPSE in 2022.
It found overall, that more than a third of freelancers have moved away from contracting since the changes came into effect in April 2021.
While the pandemic and Brexit will have contributed to the fall, IR35 has certainly created a barrier for the self-employed and a risk for companies using self-employed workers; with many opting to try and avoid the risk altogether by engaging workers through payroll companies.
With HMRC’s first year ‘soft landing’ on IR35 coming to an end in April, the need to understand and operate the IR35 rules correctly is more important than ever.
To do this, businesses must fully understand their labour supply chains in order to identify where personal service companies (PSCs) and other intermediaries are being used.
Get your determination right
We see a number of cases where the status determination has been carried out at the wrong point in the supply chain, particularly where there are other parties (e.g. agencies) involved, which can result in potential PAYE and NIC due liabilities.
Also, carrying out the status determination itself can be a challenge for many businesses, particularly when using the HMRC ‘Check Employment Status for Tax’ (“CEST”) tool.
In a recent review, the House of Lords Finance Bill Sub Committee addressed ongoing concerns around the accuracy of CEST results, highlighting the fact CEST still fails to consider mutuality of obligation, which is considered a key test in assessing employment status. It is also thought that around a fifth of all CEST assessments continues to produce an ‘unable to determine’ result.
Consider the cost of compliance
We have also seen that the way in which businesses engage with and pay certain contractors has had to change, often resulting in increased costs, for example, increased fees being charged by agencies or a direct increase in Employer’s NIC charges, where IR35 applies. In addition, there is a legal, financial and administrative burden on businesses, at a time when the UK economy could do without additional overhead spending.
Some end-clients introduced blanket bans on the use of personal service companies (PSCs) following the IR35 reform, but businesses are reversing their positions and we are beginning to see clients engaging with PSCs again.
Don’t rely on third parties
Umbrella company usage has also risen dramatically over the last 12 months as clients look to avoid IR35 risk. This still needs to be assessed as it can present its own risks if the umbrella company has adopted tax avoidance arrangements or proper due diligence has not been undertaken.
The new rules are being adopted as business as usual (BAU), with businesses and organisations becoming more comfortable with the legislation.
However, more education and major improvements to the CEST tool are undoubtedly needed to counter the ongoing challenges and ensure that UK businesses don’t lose access to the skilled talent they need in the long term.
The government need to do more!
It is possible that the economic uncertainty that IR35 generates could result in less availability of self-employed workers and no real signs of the government stepping in to solve the problems around IR35.
The government urgently needs to commission a review or ease its stance on IR35 reform and invest in improving the CEST tool to support businesses and give more certainty.
Find out more
If there are any topics raised in this Knowledge Post that you would like to talk to us more about, please do get in touch.
