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IR35 Impact: Will 2022 be a better year for contractors?

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Fresh cry for radical change to Off-payroll legislation after IR35 impact survey reveals lasting damage to talent and Treasury revenues

Revelations over the “IR35 impact” and subsequent Off-Payroll legislation on the private sector talent pool have emerged following a survey of 3,750 contractors. Overall, the findings paint a bleak picture, not just for freelancers and hiring companies, but the Treasury. Yet, things could radically change for contractors later this year.

In an IR35 Impact Survey carried out by insurer IR35 Shield, respondents revealed that many large British firms they once engaged with have outsourced talent overseas, namely India, reflecting a trend that will have lasting implications on the nation’s employment rate and the digital divide.

These large firms are experiencing a double blow. Firstly, from their quick fix blanket bans on limited company contractors, now no longer available to them, and secondly, their ability to retain highly skilled staff amidst the “great resignation”. A total of 65% of respondents said that firms lost at least half of their contractors, once on deck to aid salaried staff, but now loyal to smaller consultancies and startups.

“Small consultancies, not subject to the new rules, thrive as contractors turn away from unequipped recruitment agencies to cope with the new regime,” said the report.

Contractors in recent years have lost faith in their recruitment agencies. Largely because they are taking shortcuts. An example includes when agencies do not provide workers with a Key Information Document (KID) designed to show transparency on aspects such as pay.  KID has been a legal requirement since April 2020. However, the survey showed that 57% of contractors do not know what a KID is. Possibly more alarming is that just 26% of contractors surveyed said their agency provided them with a KID despite being a legal requirement.

When asked if the HMRC should carry out a name and shame campaign for any recruitment firms that do not adhere to KID, Chaplin said:

The best way would be to fine the firms who fail to do it, say £10,000 for the first failure. £25,000 the next one, then £50,000, then £100,000. After that, they are forced to shut down.

IR35 impact on the cost of living

Since the Off-payroll legislation came into effect, many experienced flexible workers have left contracting, becoming financially worse off which has meant less tax generated for the Treasury:

  • 426 respondents surveyed said they had moved to permanent work due to IR35.
  • 60% said working inside IR35 was not financially viable, and 73% said they were worse off.
  • 74% said they would move back to contracting if they could secure an outside IR35 contract.
  • 41% were out of work for six months or more following the roll-out.

But what is particularly painful for most parties involved is to see that since these changes have been implemented by HMRC, the Treasury’s tax revenue objectives have backfired because they have actually lost out on tax in more ways than one.

One survey respondent said: “Firms stopped hiring contractors, it was no longer viable to be a contractor, either for me or the firms that employed me. As a result, I now earn and pay less in tax.”

Other contractors highlighted that the impact of IR35 has been pushing contractors across a variety of sectors into fixed-term contracts on less money, which puts a major financial strain on families and their ability to keep up with mortgage payments, childcare and the ever-rising cost of living in the UK.

Many limited company contractors echoed this trend, which begs the question, what good is IR35 doing for the Treasury and the general upward mobility of Britain’s workforce?

Taking away British jobs is also a casualty of off-payroll legislation. “Due to IR35 I know for a fact that millions of pounds are now going to outsourced workers in India rather than people in Britain,” said another respondent.

IR35’s biggest winners: on-payroll Umbrellas

Most contractors who were unable to work genuinely “outside IR35” were told they must use an umbrella company; otherwise, the work wasn’t available to them.

According to the IR55 Impact survey findings, clients and agencies pushed 68% of contractors taking “inside IR35” contracts into using umbrellas at the time of the transition in April 2021, which increased to 75% by November 2021.

Of the “Inside IR35” cohort, 69% were given the option of umbrella or no work. In November, of those unable to work “outside IR35”, 88% were using umbrellas.

The majority (April 70%, November 87%) of on payroll contractors were given a list of umbrellas to choose from, although some were only given one choice (14% April, 12% November). Of in-work contractors in November, only 6% said they were happy to use an umbrella.

Commenting on the findings and particularly the tax avoidance market propelled by a growing number of on-payroll umbrellas, Dave Chaplin, CEO of IR35 Shield said: “The tax avoidance market reached 72% of contractors with their marketing, yet 78% of contractors can’t tell the difference between avoidance and compliance.”

Unscrupulous umbrella companies or umbrella on-payroll outfits typically enter the supply chain where agencies are not conducting proper due diligence, Chaplin tells The Freelance Informer. He adds: “They do so by reading the amount on the kickback cheque they are offered to push the victims towards the scheme.

A better year ahead for contractors

Chaplin said that as the dust is settling, firms are discovering that the “IR35 bogeyman never existed” and that wholesale blanket measures make them less competitive, putting them at the back of the queue when the free market allocates its best talent.

The findings, despite casting a shadow on the many contractors that felt they were forced into inside IR35 contracts and signing up to an umbrella company, Chaplin said that 73% of contractors will move back to contracting if they can secure an outside IR35 contract. 

“UK plc and the UK economy stands or falls without the support of flexible talent and the contracting workforce has a vital role to play,” he said.

“Having been in the IR35 arena for 20 years, including helping to fight cases at tax tribunal, I’m confident that when a firm properly adheres to its compliance obligations, the chances of it falling victim to a successful HMRC challenge are virtually zero. We are expecting a much more positive year ahead,” said Chaplin.

Related articles 👇

IR35 Archives – Freelance Informer

Off-payroll Legislative “side effects” are piling up – Freelance Informer

IR35: umbrellas are feeding HMRC’s £3.6bn tax grab – Freelance Informer

What every freelancer must prepare for in 2022 – Freelance Informer

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