Tax  

How IR35 is working six months on

How IR35 is working six months on
 Pexels/Pixaba

It has been more than six months since IR35 reform was introduced in the private sector on 6 April 6 2021 – probably the most significant moment in the history of the controversial IR35 legislation’s history. 

Changes to IR35, a similar version of which was rolled out in the public sector in 2017, mean medium and large businesses are now responsible for determining the tax status of contractors.

In other words, it is up to the end client (rather than the contractor) to decide if the working relationship resembles a self-employed engagement or employment. As part of this reform, the fee-paying party (either the end client or recruitment agency) now shoulders the liability. 

So how has contracting fared? How have businesses coped? What is the state of play and what does the future look like for this vitally important sector of the UK labour market? 

I will not gloss over the fact that some businesses – even large parts of industries – continue to uphold needless contractor bans, as a direct response to IR35 reform. But forcing genuine contractors to work on the payroll is a short-sighted, not to mention expensive move. 

However, on the whole, refusing to engage contractors is the exception, not the rule. True, reform has seen far too many true contractors either automatically deemed inside IR35 or left with no option but to work via umbrella companies, but this is not the case across the board.

Our own study, which well over 1,000 contractors participated in, showed that upon the introduction of IR35 reform, one in three were still operating outside IR35. While it is not the figure we would have hoped for, it is at least a firm foundation from which to build. And in recent months, there have been notable signs of progress. 

Let us start with one of the promising developments – news of Network Rail’s IR35 U-turn. It recently became clear that this government body had reversed its initial blanket ban on contractors.

In 2019-20, 99 per cent of contractors engaged had been placed inside IR35. Fast-forward to 2021-22 and 74 per cent now operate outside IR35. 

This is a far more accurate split, in our opinion at Qdos, where we have advised that 87 per cent of the 32,000+ contractors assessed on behalf of businesses belong outside IR35. 

While Network Rail is a public sector body, I am optimistic that its IR35 rethink will motivate private sector businesses to act – in fact, some of our own clients have changed tack in recent months. 

Many banks, financial services companies and even automotive companies could learn a lot from Network Rail – not to mention the thousands of other organisations that continue to prove IR35 reform is manageable. 

The cost of non-compliance

With IR35 reform in play, HM Revenue & Customs has wasted no time in policing compliance. 

Letters have now been received by a number of businesses in the energy and financial services sectors, with the tax authority keen to get a clear understanding of the processes in place for ensuring compliance.