IR35: Four out of ten companies considering dropping contractors

IR35: Four out of ten companies considering dropping contractors

Research by Be Digital UK found that 41% of companies are reviewing their strategy for procuring contractors over IR35.

IR35: Four out of ten companies considering dropping contractors

Four out of ten businesses are considering phasing out contractors when IR35 legislation is introduced, according to a survey conducted by Be Digital UK.

The survey is part of a continuing study into how British businesses are preparing for IR35, but with the legislation set to come into force in April, many contractors have raised concerns about the impact this will have on their employability by big firms.

The new rules will hold companies responsible for whether a contractor should be considered a full-time employee by HMRC, meaning that they would have to set up PAYE or NICs as required. This will make the hiring of contractors less attractive to SMEs and the survey’s findings will add to the uncertainty surrounding the IR35 changes.

This could have negative implications for accountants too, as they face losing freelance clients to PAYE. To offset the effects of IR35, accountants should look to use their expertise to add value to their clients and prepare them for when the legislation becomes active in April.

Dave Chaplin, CEO and founder of Contractor Calculator and IR35 Shield, emphasised the need for businesses and their accountants to prepare for when IR35 is introduced.

“Decisions made by some companies could be seen to be a kneejerk response to legislation that they simply do not know how to navigate, and we have seen other firms take blanket ban decisions to not engage contractors. As we leave the EU, reliance on a flourishing flexible workforce will be vital and firms should not panic, provided they begin their compliance process now,” he said.

John Bell, Founder and Senior Partner at licensed insolvency practitioners Clarke Bell, also described the response of the companies surveyed as a “kneejerk reaction” from businesses who aren’t prepared to take risks.

“Rather than review and assess each contract, which would be a time consuming and admin intensive process, I think firms are taking the cautious approach, for fear of getting an assessment wrong, and applying a blanket approach to hiring contractors, opting to only hire PAYE staff,” he said.

“Hirers are not prepared to take risks when it comes to assessing employment status for fear of getting it wrong. However, by taking this decision they will have to offer employees all the benefits and statutory rights that come with employment. It’s a kneejerk reaction in response to legislation which hirers perhaps don’t fully understand. Genuine self-employed contractors will miss out and so will the hiring firms.”

The Findings

The survey of more than 1,500 businesses owners found that four out of ten (41%) were planning to review their processes around hiring contractors because of IR35.

While 21% of businesses said they had already switched to statement of work contracts (SoWs), 11% of those surveyed admitted plans to take more drastic action and reduce the number of contractors they will use altogether.

Despite the controversy surrounding the introduction of IR35, more than a third of the business owners surveyed (35%) weren’t even aware of the legislation.

Richard Tyler, a spokesperson for Be Digital UK, said: “The results of this research clearly highlight the need for businesses to gain a much broader understanding of what the upcoming IR35 means and how it will affect their company finances. If businesses do not adequately prepare for the changes, it may quickly create unexpected costs and issues.”

Chaplin also urged businesses to become compliant quickly, so that they don’t become an ‘easy target’ for HMRC when IR35 is introduced.

“Getting accurate assessments done, which can be outsourced to specialists is essential. Provided firms stick within the rules and do the right thing, there is very little risk. With its limited resources, HMRC will target the low hanging fruit. Firms that have done nothing to prepare for the new legislation or tried to find ways around it will be the first set of targets.
Other than making sure they can quickly assess contractors the rest is admin and process.”

Unintended consequences

The knock-on effects of the IR35 changes will be felt by businesses as well as contractors, and with Brexit fast approaching, businesses will need access to freelancers and contractors in order to continue to grow.

Julia Kermode, Chief Executive of The Freelancer & Contractor Services Association (FCSA), said: “Freelancers and contractors are the backbone of the UK economy and with these planned reforms the Government is planning on penalising them and many of the companies they work with.”

“IR35 reform is one change that has not been properly targeted, not been proportional and not been fair for the vast majority of genuine self-employed workers or the businesses that have engaged them. Rolling out the reforms will result in a less flexible and less agile workforce that is more expensive and more complex to administer which is no doubt why many companies are making the decision to phase out their use of contractors.”

Bell agreed and said that businesses which properly assess contractors will get the best people and be able to take advantage of IR35.

“Businesses rely heavily on ‘on tap’ flexible support to fulfil their projects. Those firms that take the steps to assess contractors who are genuinely outside IR35 will undoubtedly be at an advantage to access the right skills and the best talent for the role. Hiring firms that do not shut the door on genuine contractors will attract the best people for the role.”

“As a result of the off-payroll reforms coming into effect, many contractors are facing the decision to pursue other options, and some are choosing to close down their personal service companies.”

Government Review

The government announced a review into IR35 last week, but this is not expected to delay the introduction of the legislation, and doesn’t leave much time for review, consultation or scrutiny.

Andy Chamberlain, Deputy Director of Policy at the Association of Independent Professionals and the Self-Employed (IPSE), criticised the role of the government in the introduction of IR35, claiming that more has to be done to engage with businesses over the changes.

“Troublingly, although the government promised a review of the changes to IR35, it has allowed little more than a month for it. IPSE are of course engaged with the review, but we believe it must be extended significantly – and that the rollout must be paused while this more thorough and genuinely independent review is carried out.”

“It is deeply concerning that over a third of UK businesses still don’t have a plan in place for the changes to IR35. This is yet another sign that the government has done nowhere near enough to prepare business for these drastic and dangerous changes.”

The government has committed to engage with business leaders from SMEs to review IR35, with outcomes and potentially improvements to the legislation expected in February.

To join our free webinar, Turning IR35 on its head, and keep on top of the changes – click here


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