Businesses worried about ‘missing out’ on skilled contractors after IR35 changes

Poll of medium and large employers finds most are concerned about attracting temporary workers once tax rules are applied to the private sector

The majority of decision makers in medium and large employers are concerned about missing out on skilled contractors and temporary professionals when changes to IR35 tax laws are applied to the private sector next year.

A poll of 398 senior decision-makers in medium and large-sized businesses, conducted by Robert Half this October, found more than three in five (62 per cent) organisations were either “very concerned” or “somewhat concerned” about attracting temporary workers when the changes to off-payroll tax rules come into force in April.

In addition, 42 per cent of respondents expressed concern about losing contractors they currently work with if the role they fulfil is deemed to be covered by IR35 rules – meaning income tax and national insurance deductions have to be made by the contracting organisation – citing concerns about renegotiating contracts in time.

Under IR35, contractors whose relationship with a company resembles that of an employee’s are required to have tax and national insurance contributions deducted from their earnings as if they were an employee.

The rule was introduced to ensure that workers who carry out similar jobs pay broadly the same level of tax.

Initially, contractors were required to declare whether they were affected by the legislation, but in 2017 public sector organisations were given the responsibility of ascertaining whether their contractors were covered. The change will also be rolled out to the private sector from 6 April next year. 

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Susan Ball, employer solutions tax partner at consultants RSM UK, said that the concerns expressed by business leaders were “no big surprise”. 

“HMRC says 90 per cent of personal service companies are not complying with the IR35 off-payroll working rules. Which means that many contractors are likely to seek to renegotiate contracts ahead of the change from 6 April 2020… because their net pay going forward will be less,” she explained. 

“It is therefore no big surprise that businesses cite concerns about missing out on skilled talent as the contractor pool assesses who is offering the better rates and work options,” she continued. “Those businesses that address the impact of the rules early and communicate well with their contractor workforce are likely to have a better experience.”

The poll also found 38 per cent of respondents said they would avoid losing current contractors or temporary workers by transferring them onto permanent contracts, while just 15 per cent said they planned to offer them higher pay rates to compensate for the more onerous tax obligations on workers deemed inside IR35. 

Almost one in six (59 per cent) business leaders surveyed expected demand for contractors and temporary workers to remain the same following IR35 changes, while a third (33 per cent) reported they expect demand for temporary workers to increase, creating further concerns about the changes. 

Just 7 per cent of respondents expected the demand for contractors and temporary workers to go down.

Andy Chamberlain, deputy director of policy at the Association of Independent Professional and the Self-Employed (IPSE), said that the survey “lifts a lid on just how worried UK businesses are about the IR35 changes,” adding they would significantly restrict the supply of flexible labour businesses rely on.

“The lessons from the public sector, where these rules have been in place since 2017, are clear to see. Hirers have found it extremely difficult to balance IR35 compliance with retaining and attracting vital specialist resource,” Chamberlain added, calling on the government to “hit the pause button” on the change.

Matt Weston, managing director at Robert Half UK, said that the impending IR35 rules’ impact on the UK’s temporary talent pool were of particular concern as firms “look for a blend of high performing temporary and permanent employees”.

“A number of businesses are already considering measures to stay compliant with new regulation and finding ways to compete for skilled talent who favour flexibility and autonomy,” he added.