IR35: the one-year-old off-payroll rules are dire for self-employment

Despite years of vigorous campaigning against IR35 from us and other organisations, the government finally implemented the controversial reforms to off-payroll working in the private sector and therefore put medium and large-sized businesses in charge of deciding the tax status of freelancers in April 2021, writes Derek Cribb, CEO of the Association of Independent Professionals and the Self-Employed (IPSE).

Where we are today

While many self-employed workers are still getting to grips with the changes to off-payroll working rules, it is clear that as we pass the one-year anniversary of the reforms, independent workers and their clients are now in a far more precarious position than ever before.

Self-employed workers have increased taxes and costs to absorb, and have less control and independence. Clients, on the other hand, are now dealing with an increased administrative burden and are finding it far more difficult to recruit the freelance talent that they need to survive and grow.

The impact of IR35

Shifting the responsibility for determining the tax status of freelance contractors onto clients has had dire consequences for the self-employed, with the complex rules resulting in clients taking non-compliant ‘blanket’ assessment policies -- and even blanket bans on freelancers operating through their own limited company.

According to IPSE research, more than one-third of freelancers (35%) have quit freelance contracting since the changes took effect on April 6th 2021. With half of UK businesses (49%) stating that they could not achieve the same level of growth and outcomes without the help of such independent workers, the lack of freelancers could have a knock-on effect on companies and the UK economy as a whole.

While the pandemic and Brexit have also undoubtedly impacted the self-employed over the past year, the impact of IR35 should not be understated. The changes to IR35 have added unnecessary and complicated risks for any business looking to hire self-employed workers.

These new HMRC rules? A ‘significant admin burden’ for almost half of hirers

In fact, almost one in two businesses (47%) reported that IR35 compliance had been a ‘significant administrative burden’ while over a third (35%) agreed that it had been more difficult to attract the freelance talent that their business needs as a result of the reforms.

For instance, since the reforms, businesses, across all sectors, have had to decide between hiring a freelance contractor and risking fines from HMRC or choosing to engage with workers through payroll companies and avoiding employment status rules altogether.

In order to avoid falling foul of the complex IR35 legislation, businesses – now tasked with determining the tax status of contractors – have changed how they engage freelance talent and, in many cases, reduced their level of off-payroll worker engagement altogether.

Off-payroll rules have cut freelance opportunities by 28%

Unfortunately, for self-employed workers, a significant number of companies (28%) have decreased the number of contracts they have given to freelancers since the changes to IR35.

Moreover, some businesses are now choosing to engage with freelancers only through umbrella companies. In fact, our research has shown that since the reforms, over a third of (once) self-employed workers (34%) are now working via an umbrella company. With umbrella companies coming under considerable scrutiny in recent months due to lack of regulation and the unscrupulous practices of a few bad actors, the shift towards umbrellas could lead to further insecurity within the sector, causing more people to leave contract work.

Continuing the fight

If the changes to off-payroll tax are allowed to continue, then the economic uncertainty that IR35 generates could result in more and more self-employed workers leaving freelance contracting altogether. However, despite this, there has been little evidence that the government is willing to solve the problems around IR35.

The chancellor Rishi Sunak and HMRC have ignored reports from both the House of Lords’ Economic Affairs Finance Bill Sub-Committee and the National Audit Office, which each found the changes to off-payroll tax to be flawed. Furthermore, despite vigorous campaigning from a handful of organisations (including IPSE), the government has not yet commissioned a review or reversed its stance on IR35 reform.

Finally, we fear the effects of further inaction

If it doesn’t relent soon then, regardless of what prime minister Boris Johnson or the chancellor say about ‘building back better,’ or helping the post-covid-19 recovery, the government will have jeopardised the freelance work sector’s long-term growth by causing further economic uncertainty for self-employed workers. Inaction will also dissuade former freelancers to re-join self-employment and it will allow the reform to continue to deal financial damage to a sector that has been hit considerably hard during the pandemic.