One year on: counting the cost of IR35 reform

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Date: 12 April 2022

Contractor works for a construction firm

Two new studies have found that the 2021 IR35 tax reform has had a negative impact on both freelance contractors and the businesses that employ them.

A study published by the Association of Independent Professionals and the Self-Employed (IPSE) has found that 28% of companies have reduced the number of contracts they have given to freelancers since the reform to IR35 in April 2021 - even though 49% of firms say they could not achieve their business goals without the help of contractors.

It suggests that companies that employ freelancers have been negatively affected by IR35 changes, as well as contractors themselves.

The research, conducted by YouGov for IPSE, looked at the impact of IR35 reform on the clients of self-employed workers. It found that the changes to the off-payroll working rules have had significant economic consequences for businesses, with 42% reporting that the IR35 reforms have had negative financial implications for their business.

Implemented in April 2021, IR35 has shifted the responsibility for determining a self-employed worker's employment status from individual freelancers to their clients. IPSE research has found that more than a third of freelancers (35%) have closed their businesses since the changes came into effect.

Derek Cribb, IPSE ceo, said: "While the media, over the past year, has mainly analysed the significant and damaging impact of the reforms on self-employed workers, today's research shows that the changes to off-payroll working have also hindered their clients. Businesses have long relied on freelancers to provide additional expertise and support. The changes to IR35 in the private sector in April 2021 have made it harder for them to hire contractors and has therefore made it even more difficult for them to grow during these turbulent economic times.

"If the government wants to help companies recover post-pandemic, then it needs to start by rethinking IR35. Self-employed workers provide a valuable service for businesses and without a governmental review or further reform, companies will find they aren't able to hire the necessary skills and talent that freelancers provide and that they are recovering at a slower pace compared to international competitors."

The IPSE findings are backed up by new research conducted by Kingsbridge Contractor Insurance. Its survey of 1,200 contractors, recruitment businesses and end clients also suggests that IR35 is stifling growth in the industry. Its key findings include:

  • 70% of businesses and recruiters have seen a drop in their limited company PSC contractors since the IR35 reform;
  • 50% of businesses say IR35 has been the biggest obstacle to hiring contractors in the past 12 months - despite Brexit and the COVID pandemic;
  • 71% of contractors are looking only for outside IR35 roles over the next six to 12 months, yet these account for less than 41% of roles on offer;
  • 66% of contractors have said they would not even consider an inside IR35 role;
  • Half of contractors in the UK have considered closing their businesses, retiring or leaving the UK entirely due to IR35 reform.

Paul Havenhand, ceo of Kingsbridge Contractor Insurance, said: "The UK economy is being hampered by a severe recruitment crisis, with many businesses struggling to fill vital roles. Contractors, as a highly skilled, flexible resource, could be providing a much-needed interim solution to keep things working and avoid major disruption to UK businesses."

Written by Rachel Miller.

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