The good, the bad and the ugly of IR35 reforms

The changes to off-payroll rules that came into effect in the private sector earlier this year have created a host of new challenges for recruiters, says Seb Maley

The introduction of IR35 reform in the private sector on 6 April 2021 has not only impacted contractors in many ways, but also the businesses and recruitment agencies that rely on this vital sector of the UK’s flexible workforce. 

Ultimately, it has created a host of new challenges: for contractors whose clients are now in charge of determining IR35 status; for hiring businesses that have become responsible for carrying out these assessments; and for recruitment agencies which, in many cases, are now liable for incorrect IR35 status decisions. 

But is it all doom and gloom? And is chaos, disruption and panic the only result of the reforms to the off-payroll rules, or are there pockets of positivity, which give cause for optimism?

The good

It’s not often that the word ‘good’ is used in the same sentence as IR35, but believe it or not, it isn’t all bad. Thousands of businesses are managing IR35 in a compliant and pragmatic manner and continue to engage genuine contractors outside IR35. 

True, while the reforms have seen lots of businesses force contractors onto the payroll irrespective of their actual IR35 status, this isn’t the case across the board. Qdos research put to contractors upon the introduction of changes in April show that one in three had been deemed outside IR35 by their client – the remaining two in three had been classed inside IR35. 

With the dust having settled to a degree, I’ve no doubt that this ratio has evened out. Certainly from where we stand, the vast majority of contractors are truly self-employed and belong outside IR35.

The bad

But there is still a lot of room for improvement, clearly. The fact that 65 per cent of contractors were placed inside IR35 by their clients when reform landed tells you everything you need to know. This figure is at odds with our own data, with 87 per cent of more than 32,000 assessments carried out on behalf of businesses deserving of outside IR35 status. 

A major issue that we’re still witnessing is the eagerness to insist that all contractors work on the payroll, regardless of whether they belong there or not. While for many companies it has been business as usual despite IR35 reform, far too many have either blanket placed all contractors inside IR35 or handed them ultimatums – a ‘work via an umbrella company or have your contract cancelled’ scenario. 

Some businesses see this as the path of least resistance – a faster, easier and lower risk response to IR35 reform. Truth be told, engaging genuine contractors via PAYE is a lot more expensive and will wipe out a firm’s ability to attract the best flexible talent. It is, frankly, a needless, not to mention costly decision, given that IR35 reform is certainly manageable. 

The ugly 

From the government’s questionable approach to enforcing IR35 compliance to HMRC’s lack of reliable guidance for hiring businesses and recruitment agencies, I could focus on several problems in this section. However, perhaps the ugliest thing about IR35 reform is CEST, HMRC’s fundamentally flawed IR35 tool. 

It recently came to light that CEST had been used more than 1.1 million times between November 2019 and August 2021. As if this wasn’t enough of a worry, the same government data showed that the tool failed to deliver an answer regarding IR35 status approximately 21 per cent of the time – a shortcoming that has left more than 233,000 contractors and businesses in limbo over their compliance. 

When it comes to CEST, there’s more, of course. Despite an entire industry urging the government to overhaul the logic – by this I mean align it absolutely with IR35 case law – HMRC is of the view that it’s up to the job. The fact of the matter is that it’s not. Rather than ensuring IR35 compliance, this tool poses a very real threat to it. 

All of the above, of course, is food for thought for the Lords IR35 inquiry. This is a follow-up to last year’s report, Off-payroll working: treating people fairly. How much of a difference this second investigation into IR35 reform remains unclear at this stage, but that’s not to say it won’t highlight some of the issues I’ve touched upon. 

To summarise, as we move towards the new year – a period where businesses reflect before mapping out their plans – the story of IR35 reform so far is a mixed bag. There is plenty of work still to be done to reach a point where all businesses have the processes in place to ensure their IR35 compliance, before maintaining it. 

Seb Maley is CEO of Qdos