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IR35 Two Years On – The Good, the Bad and the Ugly

It’s been two years since the Government reformed its IR35 legislation for the private sector. This meant that the private sector was brought into line with the public sector in terms of who decides a contractor’s IR35 status. It hasn’t all been plain sailing, so we take a look back at the last couple of years, find out where we are now with IR35, and try to predict what will happen in the future.

 

Two Years On

Cast your mind back to September of 2022. The short-tenure Chancellor of the Exchequer, Kwasi Kwarteng, announced in his budget that he was considering reforming IR35. Spirits were high in the umbrella company world with the expectations that the Chancellor would do something really positive for the sector. Unfortunately, only 14 weeks into the job Mr Kwarteng was sacked as Chancellor and his promised reforms were put on the back burner by his successor, Jeremy Hunt.  

Eight months on from the reform debacle, and two years on from the private sector IR35 reform, what is the state of play for the industry? 

• Personal Service Companies are still blanket banned. You can read the methodology behind this decision here. This raises the issue of precisely how clients are accessing their contractor workforce and highlights the difficulties they face. 

• Agencies and their clients have had some time to make any adjustments they might need so roles are being advertised with the determination included in the job description – this is vital so that contractors know before they apply for a role, and can make the necessary arrangements.

• We are aware that HMRC are currently undertaking an information gathering process. The supposition is that it will begin to target clients with a large contractor population in order to make sure that their IR35 status is correctly applied. 

• CEST, the Government’s tool to Check Employment Status for Tax is still failing to reach 100% determination for contractors. Currently about 20% of contractors using the tool are finding that their status is ‘undetermined’. We covered this topic in an earlier blog so are disappointed to discover that the system still needs improvement.

• We are also disappointed to learn that, despite them being a statutory requirement, Key Information Documents (KIDS) are still not being provided every time. We discussed their importance for contractors here in order to raise awareness of this vital piece of documentation.

• All of the above have demonstrated that after the chaos of the IR35 U-turn last year, the situation will continue in its current state, showing little sign of improvement.

 

How is all this affecting the industry?

By analysing the data we receive from the agencies we deal with and the contractors that we serve, we can see a change in recent employment trends; there is a slow change from permanent roles to those on an interim basis. We deduce that this is because of the increasing financial pressures end clients are under due to factors such as Brexit, the COVID-19 pandemic, and the increase in energy costs. 

However, we are also starting to see a return to longer-term contracts, not just 1-3 month assignments, which may indicate some positive thinking in regard to future planning. Our data also show us that more hybrid roles were available for contractors. So rather than simply working from home contractors are more willing and perhaps more able to return to the office for at least part of the working week.  

In terms of the industries most impacted by IR35, which is still causing issues, the communications sector has had more roles placed inside IR35 than other areas, specifically when we compare it to, for example, IT. This may indicate an uptick in confidence within the communications industry, with clients making larger budgets available in order to ride out any potential downturn or recession.

The Public Sector itself has been fined over £200 million due to incorrect Status Determination Statements (SDS) when contractors working for it used the Government’s CEST tool. This bill will be picked up by the public. However, contractors who find themselves in this position will find that they are protected – any bill they incur will be paid by the agency that recruited them. 

Finally, due to the uncertainty surrounding IR35 there has been an increase in non compliant tax evasion schemes operated by unscrupulous umbrella companies. HMRC is very clear in its guidance on how to avoid using non-compliant umbrellas – the promise of higher-than-usual take home pay, loans, claiming that some income is ‘non-taxable’, and stating that a company is ‘HMRC-approved’ are all clues to a company that could mean contractors come under HMRC’s scrutiny, and eventually pay far more than they tried to avoid by way of fines. 

 

How is this impacting contractors?

We recently surveyed our contractors to understand exactly how they were affected by the uncertainty both in Government and in the wider commercial world. The results were extremely interesting and informative:

• Only 32% of contractors surveyed said their PSC had a successful year, and 24% said they had a poor year

• 71% of those who claimed a poor year said that it was down to the continuing IR35 turmoil, with only 2% claiming a Brexit effect

• 61% said that the biggest threat to their livelihoods in 2023 was their IR35 status

• Only 32% of Payme’s contractors had received an official SDS, with most coming through CEST, and only 65% of those people received an ‘inside’ determination

In the future we expect the CEST tool to be improved which should mean less indeterminate status determinations for contractors. This should, in its turn, mean more roles outside of IR35. However, our contractors are resourceful people and are making use of a mix of both umbrella companies for ‘inside’ work, and Limited Company status for ‘outside’ work. Most of our contractors, after taking professional advice, have been able to continue using Payme’s compliant services. 

We anticipate that end clients are waiting to see what comes of the HMRC’s information gathering process – once we hear the results we’ll make our feelings known.

In the midst of general uncertainty and speculation about the future, it continues to be in the best interest of both contractors and recruitment agencies to use a compliant, experienced and professional umbrella company, with products and services that benefit both sides of the industry, and which won’t put their money or their livelihoods at risk. If you’d like more information about how Payme can help you, either as a contractor or as a recruitment agent, call us on 0333 200 0845, email us at [email protected], or fill in the contact form at the bottom of the page here.