Half of contractors yet to have tax status assessed ahead of IR35 changes, report finds

12 Jan 2021 By Lauren Brown

Businesses leaving compliance to the last minute before April deadline face ‘severe repercussions’, according to commentators

More than half of UK employers who use contractors are still unprepared for the changes to private sector off-payroll rules due to come into force this April, a study has found. 

Despite being given an extra year to prepare for the changes to IR35 after the transition was delayed because of the coronavirus pandemic, a poll of more than 3,000 contractors by IR35 Shield has found that more than half (52 per cent) of those currently in work had yet to have their tax status assessed.

Under IR35 off-payroll rules, if a contractor is deemed to carry out similar or the same work as a permanent staff member, their employer is required to deduct income tax and national insurance contributions as if they were an employee. The legislation was introduced to ensure workers undertaking similar roles paid the same tax regardless of whether they were an employee or a contractor.

Changes to the rules that will shift the responsibility for deciding whether contractors fall ‘inside’ or ‘outside’ IR35 on to the employing businesses were due to come into force in the private sector this year, bringing it in line with the public sector. This was pushed back a year to avoid adding to the burden on employers caused by the coronavirus pandemic; however, the new rollout date of April 2021 is fast approaching.

The poll also found that quarter of respondents (23 per cent) said their client had imposed a blanket ban on limited company contractors. However, Dave Chaplin, CEO of IR35 Shield, cautioned that employers utilising blanket assessments to avoid compliance issues could end up facing “considerable disputes and recruitment struggles, many going to the back of the queue when contractors are deciding on their next contract.”

Of the contractors polled, two-thirds (65 per cent) said they planned to avoid contracts that would place them inside IR35 and therefore see them taxed as an employee, while nearly three-quarters (72 per cent) said they would increase their rate to make up for the lost earnings. More than half (57 per cent) said they would likely leave their client because of their IR35 determination.

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“Blanket bans on limited companies are an expensive way for firms to hire less talented professionals, whilst handing a competitive edge to their competition,” said Chaplin. “Firms need to realise that if they apply best practice and with the correct contracts in place, they can continue to hire the best contractors with confidence.”

Stephen Ravenscroft, head of employment at law firm Memery Crystal said that preparation for the changes well before April was “essential”, both in terms of auditing current off-payroll worker arrangements and planning future resourcing requirements. But, he said: “these steps take time if they are to be done properly and strategically.”

However, while it was concerning to see such a large number of employers unprepared for this April’s changes, Lucy Cohen, co-founder of accountancy firm Mazuma, said it was not a complete surprise given the challenges of the past year. “The real shame for employers who don't get their compliance in order will be the loss of talent and easily accessible diversity in their businesses,” she said.

“Contractors can provide incredible skill sets and flexibility for businesses where sometimes the more lengthy process of recruitment, onboarding and HR is not appropriate for certain projects. It's worth businesses spending the time to review their compliance to allow them the option of contractors in the future, or they'll be missing out,” said Cohen.

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