IR35 tax legislation has hit the self-employed and contractor industry hard since the rules were updated in April and according to new research from Simply Business, the majority of affected workers are planning to leave the sector. Additionally, the continued difficulties may slow down economic recovery following the pandemic.
Contractor exile
Recently, Simply Business surveyed over 250 contractors and the results showed over half (56 percent) are planning a move to permanent employment due to the IR35 reforms which came into effect earlier this year.
The results also showed 91 percent of contractors said the IR35 reforms will impact their business and of those, two thirds (55 percent) said it will have a significant impact. As the IR35 reform continues to have a costly impact, half (50 percent) believe the changes should be scrapped altogether, and two in five (38 percent) say the changes need rethinking.
Additionally, as the UK attempts to recover following the pandemic, a “staggering” 98 percent of contractors believe the reform will have a negative impact on economic recovery, with two in five (40 percent) believing a less flexible workforce – as more contractors go permanent – will harm the UK.
This followed additional research from Simply Business which showed one third (32 percent) of contractors expected to miss out on over £20,000 in take-home pay as a result of the reform – while one in five (20 percent) expected to miss out on between £10,000 and £20,000 each.
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“I feel persecuted”
Currently, there are around five million self-employed workers in the UK and contractors make up a “crucial part” of that group. To illustrate how damaging the IR35 changes could be for freelancers, Simply Business shared insight from Kevin Neal and Bill Cunnew, who are “just two out of thousands of contractors in the UK considering the long-term effect and shattering financial loss surrounding the changes to IR35.”
Mr Neal, an IT contractor, said: “The IR35 reform means I have lost an eighth of my pay to tax, fees and pension, which will have a substantial impact on my income. I feel persecuted for doing nothing more than trying to earn a living. I pay my taxes, I always have. The Inland Revenue should focus on those who do not instead of making sweeping changes that affect everyone.”
Mr Cunnew, another IT contractor, shared similar sentiment: “I contracted for 26 years through my own limited company, I earned good rates but due to IR35 the banking and insurance sector has just stopped taking LTD company contractors. After one year out of work I was forced to take a permanent job on a lot less money, as a result I am now paying about 25 percent of the tax I paid as a contractor.”
Alan Thomas, the UK CEO at Simply Business, commented on these results.
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Further support
Mr Thomas said: “Six months on, the IR35 reforms have impacted countless contractors across the UK, and have seen many miss out on a substantial part of their take-home pay. Contractors are a vital part of the economy, and with one in three expecting to miss out on over £20,000, it’s no surprise to learn that more than half intend to make the switch to permanent employment.
“We know the last 18 months have been especially difficult for contractors – many of whom were left without Government support – and that despite IR35’s delay, simple, easy-to-understand guidance was difficult to find.
“Contractors should be seen as an incredibly important part of our workforce. SMEs, self-employed and freelancers in the UK contribute trillions of pounds to the economy, and will be crucial to our recovery. Now more than ever it’s vital that we support our self-employed communities – this is why we’ve launched a free IR35 hub to offer guidance to contractors affected by the reform.”
While Mr Thomas noted the Government’s lack of support exacerbated this issue, Matt Fryer, Head of Legal Services at Brookson Legal, recently stressed the private sector itself needs to amend certain issues.
The private sector
Mr Fryer said: “Six months on from the introduction of IR35 in the private sector, and it is frustrating to see many businesses still making the same mistakes that the public sector did back in 2017. These include quick fix IR35 solutions such as contractor blanket bans and relying on online or automated tools for contractor status determinations.
“The recent high-profile Government body IR35 tax bills, which included the Department of Work and Pensions hit with an £87.9million bill, have proven that these methods are not fool proof and do not meet HMRC’s definition of reasonable care. What is often overlooked, however, is that an inadequate IR35 solution hampers the growth of the business and its access to the flexible contractor workforce.
“Getting IR35 right now, as the country is opening up and organisations are starting to recover after the impacts of the pandemic, is crucial and is the first step towards benefitting from a truly flexible workforce. This will enable businesses to offer an attractive proposition for contractors in an increasingly competitive labour market where access to flexible talent is essential for growth while reducing the risk of unexpected tax bills further down the line.”
As Mr Fryer noted, the Department of Work and Pensions (DWP) was recently hit with a substantial bill over its failures to manage IR35 rules. However, it is not the only Government body to be issued with a fine and more could be on the way.
Government penalties
In July, the DWP was issued with a £87.9million tax penalty, as a result of incorrectly determining the IR35 status of contractors it hired following changes made in 2017.
Following this, the Home Office faced a £33.5million fine for “careless” IR35 failings and the HM Courts & Tribunal Service was also handed a £12.5million tax bill.
Following these announcements, many experts noted additional penalties could be on the horizon for the state.
Hugh Gunson, a Partner at law firm Charles Russell Speechlys, said: “Any Government department could be next.
“The fact that this has happened at all highlights the significant difficulties with the new rules and the serious compliance burden they place on businesses. If the Government itself is struggling to comply with its own rules, it is to be hoped HMRC will show a degree of leniency to private sector businesses that find themselves in a similar position.”
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