Changes to IR35, the off-payroll legislation that came into effect in the private sector in April 2021, have been painted in a bad light since they were first introduced. With high profile penalties in the public sector and criticism of the government’s CEST tool, this is understandable. However, the purpose of the legislation is to provide an effective tax framework for the engagement of a flexible workforce.
Accessing a contingent workforce is key for many sectors, enabling companies to remain flexible, attract new skills, manage costs and complement permanent headcount to support business growth. There is an opportunity now to review your approach to the legislation and implement a robust IR35 strategy that will open the door to agile resources while maintaining control of costs and compliance.
The Race for Talent
Accessing the flexible workforce is crucial for many organizations. When we surveyed medium to large companies that use contractors at the turn of the year, 90% said that they plan to extend their use of contractors over the next 18 months.
When we asked them what they considered to be the greatest risks from having a poor IR35 solution, more recognized commercial risks, including contractor costs (53%), talent attraction (42%) and project delays (42%), as potential concerns over unforeseen tax bills (31%).
One of the most significant findings of our research, however, was that 77% of respondents are finding it difficult to hire and access the flexible workforce that they need to grow.
Spiraling Rates of Pay
To address this challenge, 87% of medium to large companies that use contractors or freelancers were forced to increase their contractor pay rates between the introduction of changes to the IR35 tax rules in April 2021 and the start of 2022. 75% of companies raised their contractor rates by 11% or more in this time. The was prior to the rapid rise of inflation in Q1 2022, which only makes matters worse.
Increasing contractor rates can cause a strain on the growth of a business, but it doesn’t guarantee the recruitment or retainment of the flexible workforce. With record numbers of vacancies available, we are currently in a job seeker’s market, so being attractive to potential contractors is crucial.
Regaining Control Through IR35
For contractors, the key to this is offering outside IR35 roles. These not only provide better take-home pay — with no requirement to pay employment taxes or the increased National Insurance rate — but they provide contractors with greater freedom to choose how and when they work. This has been supported by recent research from Kingsbridge Contractor Insurance, which revealed 66% of contractors said they would not even consider a role inside IR35 rules, despite outside IR35 roles only accounting for 41% of contract jobs on offer.
According to data from HMRC, only around one-third of contractor roles in the UK should be determined as inside IR35, while the other two-thirds could be determined as outside. Recent research from IPSE shows that 43% of freelancers reported that they had worked on contracts deemed outside IR35 over the last 12 months. A further 31% stated that they had refused a contract because the client deemed the engagement to be inside IR35. Similarly, 20% had stopped working with a client because the client now deemed the engagement to be within IR35.
Having a robust flexible workforce strategy in place can ensure that all roles which should be outside of IR35 have the appropriate structure and contracts in place to remain compliant. These processes also offer greater visibility for compliance and cost control. 43% of those we surveyed said they have a better visibility of contractor workforce because of their IR35 solution.
Reaping the Benefits
There are some who are still keen to repeal the IR35 changes. This is understandable, given the challenges that these changes have presented for businesses over the last two years. However, as our economy recovers, there is an opportunity to reassess the benefits that a robust IR35 solution can deliver for more flexible and agile ways of working.
Dedicating time to implement IR35 correctly will allow businesses to increase their visibility of contractor workforces, keep better control of costs and engage with the large pool of contractors and freelancers who wish to continue working outside of IR35.