Changes to the off-payroll working rules in the UK, namely IR35, have had “devastating economic consequences for businesses,” according to a poll of more than 500 companies. Over two in five companies (42%) reported that the IR35 reforms have had negative financial implications for their business.
The survey was conducted by YouGov on behalf of IPSE to find out the impact of IR35 reforms on the clients of self-employed workers. Despite half of UK businesses (49%) stating that they could not achieve their level of growth and outcomes without the help of contractors, a significant number of companies (28%) have decreased the number of contracts they have given to freelancers since the reforms to IR35 in April 2021.
And those British businesses paid the price.
“While the media, over the past year, has mainly analysed the significant and damaging impact of the reforms on self-employed workers, [our] research shows that the changes to off-payroll working has also hindered their client,” says Derek Cribb, CEO of IPSE (the Association of Independent Professionals and the Self-Employed).
Businesses have long relied on freelancers to provide additional expertise and support. The changes to IR35 in the private sector in April 2021 have made it harder for them to hire contractors and has therefore made it even more difficult for them to grow during these turbulent economic times.
Derek Cribb, CEO of IPSE
Cribb suggests that if the government wants to help companies recover post-pandemic, then it needs to start by rethinking IR35.
“Without a governmental review or further reform, companies will find they aren’t able to hire the necessary skills and talent that freelancers provide and that they are recovering at a slower pace compared to international competitors,” says Cribb.
Implemented in April 2021, IR35 has shifted the responsibility for determining a self-employed worker’s employment status from individual freelancers to their clients.
The reform has been widely criticised, with a number of organisations, freelancers, opposition parties and even some Conservative MPs calling out the reforms as “flawed”. It has also caused mass uncertainty in the sector, with IPSE research finding that more than a third of freelancers (35%) have closed their businesses since the changes. That in itself is devastating to families and the economy.
Media and creative sectors slammed by IR35
HRMC’s approach to IR35 is especially hampering UK growth in the media and creative sectors, according to Kingsbridge Contractor Insurance. The firm conducted its own research with 1,200 contractors, recruitment businesses and end clients, and found the following, reiterating the negative impact that the reforms have had on businesses and the self-employed workforce, which in the end is stifling economic growth.
More than 70% of contractors are looking only for outside IR35 roles over the next 6 to 12 months, despite these accounting for less than 41% of roles on offer. 66% of contractors have said they would not even consider an inside IR35 role.
As a result, nearly half of contractors have considered closing their businesses, and 25% have sought work outside the UK. The impact for the media sector is restricted access to a much needed, highly skilled, flexible workforce.
- 50% of businesses reported that IR35, the UK’s anti-avoidance tax legislation, was the biggest obstacle to hiring contractors over the past 12 months
- More than 70% of businesses and recruiters have seen a drop in limited company PSC contractors since the IR35 reform
- Half of the contractors in the UK have considered closing their businesses, retiring, or leaving the UK entirely due to IR35 reform
- 25% of contractors in the UK are seeking work abroad
- The media sector relies heavily on specialist contractor skills, with over 426,789 contractors and freelancers currently working in the industry
- HMRC’s Check Employment Status for Tax tool (CEST) is not fit for purpose and is hampering businesses’ growth by blocking access to vital contract labour
Why IR35 isn’t working for anyone including HMRC
Another obstacle facing media and creative firms working with contractors is an increase in day rates, Kingsbridge points out. Their research shows that 65% of contractors would try to negotiate an increased rate if placed inside IR35, with respondents suggesting that this could be up to a 25% increase.
This is already the case for many. 37% of contractors deemed inside IR35 have seen their day-rate increase in the last 12 months, compared to 20% of contractors deemed outside IR35. So, businesses working within creative industries are almost twice as likely to have to pay a contractor more to work inside IR35.
Paul Havenhand, CEO of Kingsbridge Contractor Insurance explains says the firm is in a “unique position” in the marketplace to be able to see the impact of IR35 from the different perspectives of contractors, recruiters and end clients.
The UK economy is being hampered by a severe recruitment crisis, with many businesses within the media and creative industries struggling to fill vital roles.
Contractors, as a highly-skilled, flexible resource, could be providing a much-needed interim solution to keep things working and avoid major disruption to UK businesses. Yet the complexities of IR35 and perceived risks are putting businesses off.
Paul Havenhand, CEO of Kingsbridge Contractor Insurance
Related articles:
PSCs and contractors can reclaim duplicated taxes
Inside IR35 v. the pandemic: which is the bigger threat to freelancers in 2022?
The Government simply doesn’t care.