Has the tide turned on IR35 reform?

It’s been plagued with problems and many firms have taken risk-averse approaches to ensure compliance, but the dust is slowly starting to settle on changes to off-payroll rules, explains Seb Maley

Call center: Violeta Stoimenova/Getty Images

IR35 reform in the private sector has been in force for well over a year. During this time we have witnessed good, bad and frankly, non-compliant approaches to managing these controversial tax changes, which mean medium and large firms are responsible for determining the IR35 status of contractors. 

Many businesses have taken a pragmatic approach to IR35 reform. Others haven’t, choosing to stop engaging contractors altogether. A few have even blanket-placed vast numbers of contractors ‘inside IR35’ – a needless, not to mention non-compliant, reaction to reform.

However, a risk-averse strategy is becoming the exception, not the rule. Certainly in my experience, in the year or so since the roll-out of IR35 changes in the private sector, the picture is gradually becoming more positive. By this, I mean the number of businesses engaging genuine contractors outside IR35 in a compliant manner is on the rise.

True, there is still a lot of work to be done, particularly in convincing some firms that IR35 reform is manageable – and plenty of companies have a long way to go to ensure their ongoing IR35 compliance across the board. 

So for businesses wanting to understand exactly how to combat the off-payroll changes or those looking for a little reassurance that their approach is the right one, I’ll now focus on the steps thousands of businesses are taking to ensure their IR35 compliance.

CEST’s flaws are now widely acknowledged 

Not fully aligned with IR35 case law, unable to make a decision around 20 per cent of the time and even leaving several public sector bodies with multi-million-pound tax bills, believe it or not, HMRC’s fundamentally flawed Check Employment Status for Tax (CEST) tool actually threatens IR35 compliance.

However, in a welcome development, fewer businesses are relying solely on CEST to determine the IR35 status of contractors. Granted, the tool is still used widely, but due to major concerns about its accuracy, increasingly, firms want a second opinion. 

Having a wider perspective – and crucially the benefit of objectivity – is giving businesses the confidence to engage genuine contractors outside IR35.

More firms are avoiding blanket IR35 determinations 

Widespread reports of blanket IR35 assessments – which resulted in thousands of contractors being placed inside IR35 regardless of their true status – dominated the conversation in IR35 reform’s early days. 

But the tide has turned, to some extent. This non-compliant approach to IR35 reform – which lacks ‘reasonable care’ – certainly isn’t as commonplace as it was last year. 

Evidence of this is the 83 per cent surge in contractors being engaged outside IR35 between April and November 2021 – rising from 35 per cent to 64 per cent. Put differently, fewer businesses are forcing contractors inside IR35 irrespective of their status. 

While still a major issue, contractor bans are being reversed 

Where blanket placing contractors inside IR35 is non-compliant, choosing to stop engaging contractors altogether – and insisting they work via umbrella companies or become permanent employees – is not. Even so, it’s a short-sighted, expensive workaround, which means firms don’t need to consider IR35 because their contractors become employees. 

And this is still one of the biggest problem areas regarding IR35. It sees businesses absorb the costs of employment, while also losing the ability to attract and retain genuine contractors who would prefer to operate outside IR35. 

But to some extent, progress is being made. Many firms, having initially opted for what they thought was the path of least resistance, are rethinking their strategy and choosing to engage contractors outside IR35.

A final thought

Together, all of this adds up. It means more businesses are now engaging contractors outside IR35, after having carried out a rigorous and fair IR35 status assessment. 

Of course, I’m no stranger to the fact that there is still some way to go until a full recovery is made – and understandably, some contractors have very little faith in things ever returning to the days of pre-IR35 reform. The onus, therefore, is on businesses – that right now, desperately need access to flexible talent – to convince sceptical contractors otherwise. 

The companies that do this – those prioritising accurate IR35 assessments, with the risks further mitigated by insurance – will be the ones able to reap the benefits of engaging this highly skilled workforce.

Seb Maley is CEO of Qdos