IR35 reform in the private sector has been in force now for nearly four months. And medium and large businesses – who now carry the responsibility for making IR35 determinations, with fee-paying parties transferred the liability – have either implemented the rule changes compliantly or decided to abandon engaging contractors altogether.
So with the best part of a third of a year since reform, we have reached a point where we can reflect on the state of play. How much of an impact have these controversial changes had on businesses? What trends are emerging? And what do we know about HMRC’s strategy for policing compliance?
Thousands of firms managing IR35 reform successfully
IR35 reform has not wiped out contracting, as had been speculated that it would.
Thousands of businesses have the processes in place to make fair and compliant IR35 status decisions and are enjoying the benefits of engaging flexible and highly skilled contractors. This was made clear in recent Qdos research. While 65 per cent of contractors said they had been placed inside IR35 by their client, the remaining 35 per cent had been assessed as outside.
Granted, it’s not the ratio we would have hoped for – and nowhere near the 87 per cent of some 32,000 contractors that we have advised belong outside IR35 to businesses – but it’s more than enough to show that working outside IR35 is alive and well.
But there is plenty of room for improvement
You don’t need to look far to hear stories of blanket bans, where businesses have needlessly scrapped their contractor workforce. I understand the predicament businesses find themselves in. But my message to these firms is that IR35 reform is manageable. To manage reform, firms must prioritise accurate IR35 assessments, with assignments classed as outside IR35 protected with a comprehensive insurance policy.
This means a business has the best possible chance of ensuring compliant determinations and also mitigates the risk of engaging contractors outside IR35.
HMRC is serious about compliance
The tax office is under huge pressure to raise revenue. And IR35 is a key area in which they hope to do it. After all, before reform, HMRC were of the opinion that just 10 per cent of contractors who ought to be working inside IR35 were. This suggests they see the changes as an opportunity.
Another potential sign of things to come is the £87.9m tax bill that the Department for Work and Pensions (DWP) paid HMRC as a result of IR35 non-compliance. This is staggering, albeit quite different to any other business being handed a bill of that size. Even so, it could be viewed as a signal of intent.
But a sum like this isn’t a reason to stop working with contractors, it’s a reason to prioritise compliance.
CEST shows zero signs of improvement
HMRC’s IR35 tool, Check Employment Status for Tax (CEST), remains fundamentally flawed. After more than four years in operation it’s clear that HMRC has no desire to ensure it fully aligns with case law. The DWP used CEST to determine the IR35 status of contractors engaged and just look where that got them.
Businesses are under no obligation to use CEST, though. An independent IR35 review carried out by an expert offers a far more reliable assessment of status, and one that, unlike CEST, is more likely to stand up in court.
If a business does use CEST, they should get a second opinion. I can’t stress the importance of this enough.
The road ahead
So what does the long-term landscape look like?
As businesses see others experiencing the benefits of engaging genuine contractors outside IR35, they will follow suit. Glance at LinkedIn and you’ll see that many firms are treating a fair approach as a strategy for talent acquisition. Similarly, many contractors have made it clear they will only accept outside IR35 projects, realising they are still available.
In this candidate-short market, where demand for contractors is outstripping supply, businesses that continue to engage these workers will be in a stronger position to secure the talent they need.
Sure, not all firms see things this way, and it’s inevitable that some risk-averse ones will stop working with contractors permanently. But in the long run and overall? I firmly believe this will be the exception rather than the rule.
Seb Maley is CEO at Qdos