One in five businesses plan to drop contractors because of IR35

A fifth of of UK businesses say they are planning to axe contractors completely to ensure they are fully tax compliant ahead of the IR35 changes planned for next year, according to a survey from recruitment firm Harvey Nash. The 2019 Harvey Nash IR35 Sentiment Survey (registration) of 1,200 businesses and contractors claims to reveal the confusion that still reigns around IR35 legislation among both contractors and the businesses that rely on them. The findings suggest that 83 percent) of businesses believe IR35 will impact negatively on their industry. Meanwhile 60 percent of contractors say they have experienced increased anxiety, stressing or worrying about how the new rules will affect them.

Concerns are deepened further by the lack of an Autumn statement to confirm the details on the new regulation, which is to be extended to the private sector in April 2020. The Harvey Nash report unearthed significant confusion among businesses about their responsibilities, with 42 percent believing it was the contractor’s responsibility to understand whether IR35 applies to them.

Over half of private sector businesses (56 percent) admitted they don’t feel prepared for the revised IR35 legislation, and 87 percent believed HMRC is not doing enough to support the transition. Of those businesses who said they are preparing for the change, 22 percent said they may stop using contractors altogether after April 2020, shrinking the job market for contractors, pushing them towards permanent roles or seeking alternative opportunities abroad, outside of IR35 rules.

Hurting the economy

When it comes to the wider business landscape, 88 percent of those surveyed said they feel IR35 will have a negative impact on the UK economy, 91 percent say it will damage productivity, and 84 percent believe it will restrict innovation. At a time of great political and economic uncertainty, it seems IR35 is viewed as an additional and unwelcome spanner in the works by both businesses and contractors.

[perfectpullquote align=”right” bordertop=”false” cite=”” link=”” color=”” class=”” size=””]One in ten contractors is considering seeking a permanent role as a result of the imminent change[/perfectpullquote]

Colin Morley, Professional Services Director, Harvey Nash said: “This insight from both contractors and private sector businesses points to a perfect storm on the horizon. Both sides in the contractor-client relationship will be affected. Contractors need to establish their status and take the necessary steps to secure their livelihood, while businesses need to make their IR35 strategy crystal clear to their contractors.”

Almost one in five (17 percent) contractors said they will have to increase their fees to cover the rise in taxes, which could be as much as 30 percent if the business they work for moves them to the PAYE system. This could have a knock-on effect for businesses, increasing their budgets for projects reliant on contractors for delivery. One in ten contractors is considering seeking a permanent role as a result of the imminent change.

Contractors also cited doubts around whether HMRC is taking the potential drain of contractor resources seriously enough. One third said they needed more information about IR35, yet only 5 percent said they would rely on HMRC to obtain this. Almost a quarter (22 percent) said they would ask external experts for advice, while one in five (21 percent) would rely on their industry press. Of those contractors who have used HMRC’s online tool, CEST (Check Employment Status for Tax) over half (54 percent) said it was not useful or accurate. It seems therefore that contractors have serious concerns about the damaging impact IR35 could have on their livelihoods, and they have lost confidence in HMRC’s ability to provide accurate and timely information.

Will Jones, Director of Portfolio Solutions at Harvey Nash said: “As organisations navigate the unfamiliar territory of the 4th industrial revolution, speed and agility are key to carving out a competitive advantage. The contingent workforce is more crucial than ever in providing them with the agility to adapt to the rapidly changing digital environment. At a time when Government should be doing everything it can to support British business, the feedback from respondents is that HMRC is not doing nearly enough to smooth the transition. What we need now is for HMRC to help us all by giving clear and precise guidance to remove ambiguity.”

A mistake

Earlier this week, the Federation of Small Businesses issued a statement saying that the new rules were a big mistake. The planned changes would shift responsibility for determining worker status from contractor to employer and make hiring sole traders less appealing.

“Against such an uncertain backdrop, the self-employed certainly don’t need an IR35 rule change that makes hiring contractors less attractive. We’ve already heard noises from big corporates to indicate that, if this change does take effect in April as planned, they’ll pull the plug on sole traders,” said Mike Cherry, national chairman of the FSB. “Common sense dictates that a delay to the April roll-out of these rules is now needed.”

The existing off-payroll working rules were introduced in 2000 to stop taxpayers avoiding employment taxes by working through their own companies. They were toughened up for the public sector in April 2017 when responsibility for deciding whether the rules apply and for deducting the appropriate taxes passed from the individual contractor to public authorities.