IR35 outstrips tax increases and cost of living as contractors’ biggest concern for 2023
Despite inflation reaching a 41-year high recently and the raft of tax freezes and tax hikes to be introduced in the 2023/24 tax year, the IR35 legislation remains contractors’ biggest concern for the year ahead.
This is according to research carried out by IR35 insurance provider, Qdos which surveyed 700 contractors regarding the key issues impacting independent working in the UK, as part of the firm’s Annual Contractor Survey.
More than a third (36.2%) cited the IR35 legislation as their biggest fear for 2023, compared to those who see the rising cost of living (31.7%) and incoming tax increases (25.2%) as the main challenges to overcome. This is likely a result of IR35 being perceived by contractors as the biggest contributing factor (61.1%) to poor business performance in 2022.
Why are contractors so scared of IR35 and Off-Payroll reform?
In April 2021, IR35 reform (the off-payroll working rules) was introduced in the private sector, making medium and large businesses responsible for determining the IR35 status of contractors they engage. These changes mirror those rolled out in the public sector in 2017.
While eight in ten contractors said they were able to secure a contract outside IR35 last year – marking a 15.4% increase on 2021 – nearly half (44.3%) said this was difficult to accomplish. This year, the majority of contractors (61%) are of the opinion that it won’t become any easier to secure contracts outside the scope of the IR35 legislation.
If a contractor is deemed inside IR35 by a business or told to operate on the payroll, via an umbrella company, for example, it can hit their take-home pay by up to 30%.
Seb Maley, CEO of Qdos
The Freelance Informer asked Seb Maley, CEO of Qdos, if he could get to the crux of why contractors are so afraid of IR35.
“First, you have to look at the potential cost of IR35 non-compliance, which can amount to hundreds of thousands of pounds – potentially more,” says Maley.
“Added to this is HMRC’s heavy-handed approach to IR35 compliance and unfair pursuit of many genuine contractors over the years. And, of course, you have the off-payroll working rules, which have resulted in many contractors being wrongly placed inside the scope of the IR35 legislation or forced into operating via umbrella companies,” he says.
In addition to worrying about worker status, a huge decrease in take-home pay is also a scary prospect for many contractors.
“If a contractor is deemed inside IR35 by a business or told to operate on the payroll, via an umbrella company, for example, it can hit their take-home pay by up to 30%,” says Maley.
He adds, “Given so many contractors have been left with no choice but to work on the payroll or have their contract cancelled by a client since reform was rolled out, it’s no surprise that IR35 remains the major concern this year.”
The cost of living crisis is less scary than IR35 for contractors
“There is a cost of living crisis happening, yet IR35 remains contractors’ greatest fear for the year ahead,” Maley tells The FI.
Whichever way you look at it, he says, the introduction of the off-payroll working rules has made operating outside the scope of IR35 more difficult for genuinely self-employed contractors.
Qdos’ research found that most contractors were able to secure contracts outside IR35 last year.
“This is hugely positive given that the vast majority of contractors, in our view, belong outside IR35,” says Maley. “But there’s clearly still a lot of work to be done,” he says, “particularly by businesses. Far too many have insisted that contractors operate on the payroll, regardless of their true IR35 status. This is a needless, expensive and sometimes even non-compliant approach to managing IR35.”
Maley says that HMRC is making no secret about its increased IR35 compliance activity, either.
“This will no doubt play on the minds of contractors, and indeed businesses, which can also be hit with massive tax bills for non-compliance,” says Maley.