Before the changes in responsibility for IR35 legislation that finally came into force for private sector organisations in April 2021 we wrote a blog on what the landscape might look like for contractors and end hirers. Over 2 years on we thought we would reflect on the changes and see how it has impacted the interim market across our Finance and HR specialisms.
It’s certainly been a changeable landscape………. the pandemic brought a delay to what was initially due to come into effect in April 2020, but was understandably postponed a year. Then came the hiatus of the “mini budget” in October 2022 where the then Chancellor of the Exchequer announced the reforms were being scrapped as part of a drive to cut red tape for employers and make it easier to hire new staff. Fast forward less than a month (no joke!) and the new Chancellor announced a U-turn stating, “We will no longer be proceeding with the reversal of off payroll working reforms [IR35] introduced in 2017 and 2021.” Will they/won’t they?… it was certainly a guessing game for a while, but things seem to have settled down which for those responsible for recruitment compliance like myself has come as a huge relief as it means we can actually follow a process and know we are compliant with the legislation!
But before we look at the impact of the reform changes here is a brief recap on what exactly is IR35?
IR35, also known as the "off-payroll working rules," was introduced to prevent tax avoidance by individuals who provide services through an intermediary, typically a personal service company (PSC), to a client but should be considered employees for tax purposes. The key determinant is whether the contractor is genuinely self-employed or, in reality, an employee in all but name.
Impact of changes on Contractors:
Tax Liability: One of the most significant changes for contractors is the shift in tax liability. Previously, it was the responsibility of contractors to determine their IR35 status. However, with the new rules in place, the burden of determining IR35 status falls on the recruitment end hirer. If a contractor is found to be 'inside IR35,' the end hirer is responsible for deducting tax and National Insurance contributions at source, similar to an employee.
Reduced Take-Home Pay: Contractors found 'inside IR35' may experience a reduction in their take-home pay due to the additional tax and National Insurance deductions. This change has prompted some contractors to renegotiate their rates to compensate for the decrease in earnings.
Employment Rights: Contractors classified as 'inside IR35' may gain certain employment rights, such as paid holidays and pension contributions. While this may seem beneficial, it can also blur the line between the traditional contractor and employee roles.
Administrative Burden: Contractors may experience an increase in administrative work, particularly in dealing with disputes over IR35 status, tax deductions, and negotiations with end hirers.
Impact on Recruitment End Hirers (Recruitment Company Clients)
Increased Compliance Responsibility: Recruitment end hirers must now take on the responsibility of determining IR35 status for each contractor they engage. This process involves conducting thorough assessments of each contractor's working arrangement, a task that can be both time-consuming and complex.
Talent Attraction and Retention: The changes brought about by IR35 may affect an end hirer's ability to attract and retain top talent. Some contractors may be reluctant to work with end hirers who classify them as 'inside IR35' due to the associated decrease in take-home pay.
Administrative Overheads: To ensure compliance with IR35, end hirers and recruitment agencies needed to invest in systems and processes to manage assessments, payroll deductions, and reporting. This has undoubtedly led to increased administrative costs and overheads.
The IR35 changes in the private sector have undoubtedly transformed the landscape for contractors and recruitment end hirers. While these changes bring increased compliance and administrative responsibilities, they also offer opportunities for clarity and fairness in employment taxation. By understanding the implications and proactively addressing them, contractors and end hirers can navigate this new terrain successfully and maintain a healthy and productive working relationship. Adapting to these changes and seeking professional advice when needed will be key to ensuring long-term success in a post-IR35 world.
So has this been the death of the interim market as all the harbingers of doom predicted? Luckily for us as a recruitment firm it has not!!
While it's impossible to provide precise numbers or a definitive answer to whether the number of contractors has dropped as a direct result of the reforms, there are some trends and observations that we have seen:
Initial Drop in Contractor Numbers: In the immediate aftermath of the IR35 changes, some reports suggested a reduction in the number of contractors being hired by private sector businesses. This decline was partially due to the uncertainty and adjustments surrounding the new regulations. Many contractors and end hirers were still getting used to the new rules, which led to caution in hiring contractors.
Shift in Hiring Practices: Instead of completely banishing the use of contractors, many private sector businesses opted to reassess their hiring practices. They conducted thorough IR35 assessments and took steps to ensure compliance with the new rules. This meant that some roles previously filled by contractors were brought in-house or were advertised as Inside IR35 contracts.
Diversification of the Workforce: Some organisations chose to diversify their workforce by hiring a mix of permanent employees and contractors. Some restructured their workforce to take a more balanced approach to meet their specific business needs.
Industries and Roles: The impact of IR35 has varied across different industries and roles. Some sectors, such as finance and IT, heavily reliant on contractors, may have felt the changes more keenly than others. On the flip side, some roles that are genuinely self-employed and clearly outside IR35 are less affected.
Contractor Adaptation: Many contractors adapted to the new regulations by renegotiating contracts, adjusting their rates, or seeking opportunities in sectors or projects less affected by IR35. Some contractors also decided to accept Inside IR35 roles, especially if the terms and compensation were competitive.
Long-Term Impact: It's important to note that the full long-term impact of IR35 changes may take time to become apparent. The extent to which businesses and contractors adjust to these changes may evolve over several years as both parties become more familiar with the regulations and adapt their strategies accordingly.
Tips for managing the complexities of IR35
Contract Review: Review your contracts carefully to ensure they accurately reflect your working arrangements. Seek legal and tax advice if necessary.
Negotiation: Consider negotiating your rates with end hirers to account for the reduction in take-home pay resulting from IR35.
Diversify: Explore alternative income streams or consider switching to roles that are genuinely self-employed to avoid the complexities of IR35.
For Recruitment End Hirers:
Compliance Measures: Invest in tools and expertise to ensure proper compliance with IR35. Consider working with legal and tax professionals to conduct assessments.
Communication: Maintain open and transparent communication with contractors regarding IR35 status and the reasons behind the determination.
Talent Management: Focus on retaining top talent by offering competitive rates and benefits to offset the impact of IR35.
So to sum up, while it’s safe to assume there was an initial impact on the numbers of contractors hired into the private sector due to IR35 changes, it's a moving feast, and the effects have varied across industries and organisations. Many businesses have found ways to continue engaging contractors while ensuring compliance, and contractors themselves have adjusted to the new landscape. The long-term consequences and trends will continue to unfold as both contractors and end hirers refine their approaches to working within the framework of the updated regulations. In the meantime if this blog still leaves you with questions give one of the interim recruiters at Wade Macdonald a call to discuss possible solutions for you.