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How Did IR35 Reform Affect the Contracting Industry?

In the run up to IR35 reform a lot was written about the potential effects on contractors, recruiters and end clients. The reform has now been with us since April 2021, and in this article we'll look at what actually happened, whether any of those predictions came true, and how our beleaguered and resilient industry is adjusting to the new rules.

Early effects were worsened by Covid-19

The biggest danger was always that end clients would not be prepared to execute their new responsibilities correctly, and that this would lead to last minute knee-jerk responses. This definitely happened, but it can largely be attributed to the pandemic, which saw other areas grabbing attention and resources. The net effect of this was that the unfair and unintended fallout that we saw in the Public Sector in 2017 were widely repeated, with thousands of contractors and ultimately end clients themselves facing the consequences.

For many contractors, this meant being caught up in a blanket decision that incorrectly found them to be inside IR35, or seeing their clients refuse to work with PSCs. We saw a marked swing towards umbrella in March and April 2021, much of it driven by risk-averse end clients who had not had the chance to prepare.

The dust is beginning to settle

Blanket IR35 determinations and PSC bans were used as a quick way to control the headline risks, but they came at a high price. Many clients quickly reassessed their position in the face of recruitment difficulties and higher costs, once they had the opportunity to do so. We’re seeing more and more clients assessing IR35 correctly, and this trend is likely to continue as the market adapts and adjusts.

It’s well worth assessing IR35 correctly

Whatever the Government’s expectations may have been, and despite the fear and uncertainty contractors lived with in the years before the reform was implemented, the majority of correct assessments are resulting in outside IR35 decisions.

Excluding blanket assessments and bans, we’re seeing less than a third of contractors being found to be inside IR35. Where your clients assess correctly and allow contractors to trade through PSCs where appropriate, they can make themselves more attractive to contractors, and reduce the cost of hiring at the same time.

The underlying issue, that IR35 assessments require specialist expertise and an investment of time and resources, still remains. We would strongly advise most clients to involve IR35 compliance experts, whose knowledge and experience can help to overcome those difficulties.

Use of CEST

If your clients were in any doubt about whether they should use the Government’s own online status tool, Check Employment Status for Tax (CEST), yet more damning evidence has recently been revealed when HMRC published usage statistics for the period between November 2019 and May 2021. According to the published figures, CEST returned the following results during that period:

  • 499,974 outside IR35

  • 308,176 inside IR35

  • 210,100 undetermined

According to their own published data, CEST was not able to determine IR35 status in more than two hundred thousand cases. In context, this is just one episode in a long line of failures and criticisms, going back to CEST’s launch in 2017, the most serious of which is that it isn’t aligned with case law and cannot be relied upon to return accurate results. Our advice about using CEST remains the same – if your clients insist on using it the results should be checked by specialist experts before they’re used in any kind of decision.

How we can help your clients

If your clients have asked you about their IR35 process, we can assess their position, including the size and make-up of their contingent workforce, the contractual arrangements in the supply chain and the working practices in place. We’ll then make bespoke recommendations based on those findings, and help your client implement the necessary processes to minimise risk and cost while protecting their supply chain from unnecessary disruption.

How we can help your contractors

As an established and respected contractor management company, we offer a full range of compliant solutions, including professional umbrella employment, specialist contractor accountancy services and CIS self-employed solutions. This means we’re ideally placed to advise your contractors on the best way forward, whatever their current circumstances or employment status.

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