Empowering the Freelance Economy

True cost of IR35 to contractors and economy

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Business insurer Simply Business surveyed 250 self-employed people in different professions, including IT, business consultancy, and project management. Two-thirds expect IR35 reform will significantly impact their business with no benefit to the economy or the taxman. Some contractors expect to be earning thousands less each year, which will impact supporting their dependents and outgoings.

The reform has shifted the responsibility for working out a contractor’s employment status for tax from the contractor to their hirer. HMRC’s goal of the reform is to increase compliance with the rules and avoid disguised employment. However, every contractor’s situation is very unique and should not be treated the same.

What does less contractors mean for the economy?

In practice, many contractors believe that the change will make the self-employed less flexible – and could result in less tax for the government, harming the UK economy.

More than half of the self-employed people surveyed said they’re at least considering permanent employment. This could be because certain sectors, such as banking and insurance have placed blanket bans on contractors. Other industries have pushed for PAYE umbrella schemes, which places additional umbrella fees on the contractor. If they go through an agency, they will have to negotiate their day rate to make sure that they are not getting hit by the recruiter’s margin.

Out of those, 15 per cent said that they will look for – and accept – a permanent role within the next 12 months.

Many contractors said that this is how the UK economy will “ultimately be harmed”, according to the survey.

More than half of contractors expect a big impact on the UK economy, with two-fifths agreeing that with more contractors going permanent, the UK will have a less flexible workforce. Just over a quarter agreed that with fewer contractors working, they’ll be able to contribute less to the UK economy.

“I don’t think HMRC will see much increase in revenue, particularly on the back of Covid-19. Contractors will have to accept lower rates from clients (who are looking to balance their own books),” said one respondent.

“Furthermore, HMRC will see gains from PAYE and National Insurance being offset by losses from Corporation Tax and Dividend Tax.

“A more sustainable solution would be to require all limited companies with less than 10 full-time employees to have higher payroll than dividends. And all self-employed to be allowed a fixed percentage of tax-deductible costs.”

How worse off could contractors be?

The majority of contractors surveyed expect a significant hit to their finances as a result of the change:

  • nearly a third of contractors expect it will cost them more than £20,000
  • 31 per cent of contractors expect it to cost between £5,000 and £20,000
  • 18 per cent of contractors said they weren’t sure how much it’ll cost, with only eight per cent saying they don’t expect costs
  • 68 per cent agreed that the financial impact on their business is their biggest concern about the changes.
How much do you expect the IR35 reform to cost you?% agreed
More than £20,00032.4%
£10,000-£20,00020%
£5,000-£10,00010.8%
£1,000-£5,0008%
No cost8%
Not sure/other20.8%

How have you been impacted emotionally and financially since the latest IR35 reforms have come into effect? What alternative tax mechanisms could create a happy medium between contractor flexibility and tax revenue generation? Please leave your comments below. 👇

5 Comments
  1. Paul says

    As I can no longer claim expenses due to IR35 I can only consider local contracts. This will affect the short term renters, b&b, the amount of fuel I buy. I will not be eating out each night away from home and my car will need less servicing, if you times that by thousands of contractors then the economy will be worse off.

  2. mehmet says

    IR35 = no cotracting everybody should be permanent formal officers. That is so opposite of free business economy. I just know one thing when there is no freedom in any area, the economy in that area suffers always… Hope it wont be too late to return from that big mistake at all.

  3. Graham says

    Lets not forget why IR35 exists: Originally way back a bunch of large consultancies petitioned the Inland Revenue (HMRC name at the time) to bring in this law arguing they could gain significant revenue. But the real reason was that they could offer contractors a “way out” by hiring them and placing them and thus would profit from their engagements. So the real motivation was always profit and the HMRC are suckers for continuing to push their agenda. The HMRC received more tax from a contractor than an employee, period. As someone who is a contractor, is also an employer of both contractors and employees, has been an employee in the past I have seen all sides. As a business and a worker I can see there is a difference between a contractor and an employee. Contractors tend to be far more eager to get things done because they are an expensive and limited resource then to be enabled by the business so they don’t waste time and money on them. Conversely employees tend to take more time as the business expects them to be around for a long time so it doesn’t matter if things “take a little longer”. In some businesses I have seen they have the model where they have employees basically hire and monitor contractors to do the “grunt work” which they then finish and productise. It’s just too simplistic to say a contractor can replace an employee, it’s like saying blue roll can replace a cotton rags for cleaning. Some business like cotton rags and some blue roll. For the HMRC to decide for them is just not free market, it’s government meddling and last time I looked we are democracy so it should not be allowed.

  4. Graham says

    Lets not forget why IR35 exists: Originally way back a bunch of large consultancies petitioned the Inland Revenue (HMRC name at the time) to bring in this law arguing they could gain significant revenue. But the real reason was that they could offer contractors a “way out” by hiring them and placing them and thus would profit from their engagements. So the real motivation was always profit and the HMRC are suckers for continuing to push their agenda.

  5. Graham says

    The HMRC received more tax from a contractor than an employee, period. As someone who is a contractor, is also an employer of both contractors and employees, has been an employee in the past I have seen all sides. As a business and a worker I can see there is a difference between a contractor and an employee. Contractors tend to be far more eager to get things done because they are an expensive and limited resource then to be enabled by the business so they don’t waste time and money on them. Conversely employees tend to take more time as the business expects them to be around for a long time so it doesn’t matter if things “take a little longer”. In some businesses I have seen they have the model where they have employees basically hire and monitor contractors to do the “grunt work” which they then finish and productise. It’s just too simplistic to say a contractor can replace an employee, it’s like saying blue roll can replace a cotton rags for cleaning. Some business like cotton rags and some blue roll. For the HMRC to decide for them is just not free market, it’s government meddling and last time I looked we are democracy so it should not be allowed.

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