IR35 reforms: Blanket-banning firms risk losing contractors and suffering reputational damage

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Private and public sector organisations that fail to take reasonable care when carrying out IR35 status determinations risk alienating their contractors and suffering reputational damage, according to research by contractor-focused online accountancy firm inniAccounts.

Compiled using feedback from nearly 500 contractors during the first month of the IR35 reforms being in force, the firm’s State of off-payroll report shows how the private sector’s response to the changes is affecting contractors and their client relationships.

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The reforms, which took effect on 6 April 2021, saw medium to large private sector organisations assume responsibility for individually determining how the contractors they engage with should be taxed, based on the work they do and how it is performed.

Previously, private sector contractors were expected to self-assess their employment status, and declare whether the way they work means they should be taxed in the same way as a salaried worker (inside IR35) or as an off-payroll employee (outside IR35).

Similar changes were introduced in the public sector back in April 2017 as part of a tax avoidance crackdown by the government over concerns that the self-assessment system could be used by contractors to misclassify their engagements to deliberately minimise their employment tax liabilities.

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The shift in responsibility has proved controversial and disruptive for contractors, as many firms across the private sector sought to comply with the changes by banning the use of limited company contractors or declaring that all the contractors on their books would be reclassified as inside IR35.

More than a month has passed since the changes came into force in the private sector, and the report highlights the impact these approaches are having on contractors.

In the research, 36% of respondents said they had secured an outside-IR35 engagement, which is up from 14% in February, when inniAccounts ran its last survey of this kind.

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Meanwhile, 35% said they were working inside IR35 or had been affected by a hiring ban. A further 29% said they were either in the midst of challenging their status determination or were currently out of work.

Aside from an uptick in the number of contractors who have secured outside-IR35 roles, another of the report’s major findings is that the contractor market has begun to divide into two since the onset of the reforms, with specialist contractors working in more niche industries better positioned to secure outside-IR35 engagements than their more generalist counterparts.

To this point, more than half (55%) of the outside-IR35 contractors who took part in the survey said skills shortages had increased their bargaining power with clients, and 70% of these individuals said their clients had used reasonable care when determining how they should be taxed.

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However, the responses garnered from inside-IR35 contractors paint a slightly different picture, with more than three-quarters (77%) of respondents in this group claiming to have received an unfairly conducted status determination.

“The evidence is there to see – there is a growing cohort of contractors that haven’t been afraid to establish greater bargaining power in terms of working arrangements and rates and will only engage with fair end-clients,” said James Poyser, CEO of inniAccounts and founder of anonymous contractor feedback website offpayroll.org.   

“They know the value they will deliver is of critical importance as the economy recovers, so much so that those with niche and high-demand skills are twice as likely to find an outside-IR35 contract.

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“As such, a two-track market of specialist and generalist contractors and consultants is emerging. Companies that engage with contractors fairly and capitalise on this trend will have their pick of the talent and will win a competitive advantage.”

On this point, just under half of the inside-IR35 respondents to the poll said they would not recommend others to work for their client because of how their status determinations were conducted, while 82% said they were on the look-out for new contracting opportunities.

Organisations that take a blanket approach to IR35 status determinations or introduce policies that prohibit the hiring of limited company contractors tend to be described as being risk averse, but Poyser says firms that behave in this way are actually putting their future prosperity at risk.

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“We know companies turn to a highly skilled flexible workforce when they need to implement strategic change or shift up a gear after an economic shock,” he said. “These findings should act as a warning to any company that is following a strategy of short-term skill for long-term recovery and growth.

“Highly skilled contractors know their worth and will not entertain the prospect of being pushed inside IR35 by unfair processes or blanket bans.”

The research chimes with anecdotal accounts given by others in the lead-up to the IR35 reforms coming into force last month. These include the insights shared by staffing firm Ellis Recruitment Group in March 2021, which said it had picked up on a “growing reluctance” among IT contractors to work for firms that had a reputation for not taking reasonable care over IR35 determinations. 

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Poyser told Computer Weekly the data also resonates with the conversations his firm is having with contractors about how the world of work is panning out for them now the reforms have had more than a month to bed in.

“I have recently spoken with a consultant working directly with a FTSE100 company’s executive board, supporting them through a change programme,” he said. “This consultant continues to be outside IR35, but publicly, and elsewhere in this organisation, there is a flat ban on outside-IR35 working.

“This particular consultant thought this was reasonable, citing the prevalence of ‘permtractors’ and first-line IT support workers previously operating outside IR35.”

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