IR35: Four In Ten UK Businesses Plan To ‘Phase Out’ Contractors

IR35: Four In Ten UK Businesses Plan To ‘Phase Out’ Contractors
Four out of ten businesses are considering phasing out contractors and off-payroll workers when IR35 legislation is introduced in April, according to new research.

The new IR35 legislation will make employers responsible for whether a contractor should be considered a full-time employee by HMRC, meaning they would have to set up PAYE and NICs as required.

IR35 legislation aims to combat tax avoidance by workers supplying services to clients, however the change will make the hiring of contractors less attractive to businesses.

HMRC has produced a factsheet for contractors, explaining the changes to off-payroll working rules (IR35).

Are you IR35 aware?

The survey of over 1,500 British business from a variety of sectors was undertaken on behalf of  Be Digital UK.

It found that 41% of those surveyed will be reviewing their strategy around engaging off-payroll workers come April 2020.  

Initially, the research found that just under two thirds (65%) of business owners were aware of the new IR35 legislation and have a plan in place to deal with the changes.

After being informed of precisely what IR35 is, 41% stated that they will look to review their strategy for procuring contractors into their businesses, meanwhile 11% said they will take more drastic action, by way of decreasing contractors numbers, in many cases restricting the progress on critical projects and other endeavours.  

One in five (21%) of businesses had already switched to outcome-based ‘statement of work’ (SoW) contracts.

Complex changes

However, almost half of 45% of business owners admitted to being confused about what action to take next. When breaking down the sectors where business owners are most confused by IR35, those operating within the construction sector emerged as the most confused by the new legislation.

Below is a breakdown of the five most perplexed areas polled: 

  1. Construction – 56%
  2. Hair & Beauty – 48%
  3. Foodservice– 43%
  4. Travel – 41%
  5. Marketing – 38%

It was finally found that just 32% of businesses felt the changes proposed in IR35 are a positive step in ensuring fair pay and taxation implementation on UK contractors.

Richard Tyler, a spokesperson for Be Digital UK, commented:

“Whilst the new off-payroll rules present a level of risk to businesses in the short-term, acquiring services using outcome-based SoW’s is a sensible way of reducing risk. However, if businesses do not adequately prepare for the changes, it may quickly create unexpected costs and issues.”

Lobbying bodies and businesses are concerned that the proposed changes will penalize freelancers and contractors and the companies that they work with at a critical time, with Brexit approaching, when companies need access to flexible workers in order to grow.

Government review

The government announced a review into IR35 last week, but this is not expected to delay the introduction of the legislation.

Andy Chamberlain, deputy director of policy at IPSE (the Association of Independent Professionals and the Self-Employed), said: “Not only has the government not said it will pause the changes, it has also allocated far too little time for a full review.

“Right now, across the sector, contractors and freelancers are panicking at the prospect of these disastrous changes.

“Major businesses, including most of the large banks, have already announced they will no longer engage contractors out of fear they will fall foul of the notoriously complex legislation.

“Even before the new rules take effect, they are precipitating a crisis among the self-employed. 

“During the election, Sajid Javid said the Conservatives were ‘on the side of the self-employed’. It must not be one of the first acts of this government to let this commitment slide.”