IR35 reform ‘hampering’ UK business growth

As today marks the one-year anniversary since changes to IR35 regulations, data has confirmed that the new approach is ‘hampering’ UK business growth.

Historically, contractors have been able to contribute more than £300bn each year to the UK economy, however more than 70% of businesses have seen a drop in their limited company PSC contractors since the reform.

Research shared by Kingsbridge Contractor Insurance as part of the whitepaper IR35 – One Year On found that more than 70% of contractors are looking only for outside IR35 roles over the next six to 12 months, despite these accounting for less than 41% of roles available.

Meanwhile, 66% of contractors agreed that they would not even consider an inside IR35 role.

Due to this, nearly half of contractors have considered closing their businesses, and 25% have sought work outside of the UK.

This impact on businesses has exasperated issues when it comes to restricted access to a much needed, highly skilled, flexible workforce.

Paul Havenhand, CEO of Kingsbridge Contractor Insurance, pointed out that the “UK economy is being hampered by a severe recruitment crisis, with many businesses struggling to fill vital roles”.

“Contractors, as a highly skilled, flexible resource, could be providing a much-needed interim solution to keep things working and avoid major disruption to UK businesses,” he added.

“But there has been an 11% drop in working contractors in the last twelve months. The complexities of IR35 and perceived risks are putting businesses off. In fact, there has been an 11% drop in working contractors in the last twelve months.”

The data highlights that too many companies are relying on CEST (Check Employment Status for Tax), the digital tool designed by HMRC, despite its limitations, but pointed out that they have developed misguided stances of blanket bans or working with umbrella companies through fear or risk.

It added that using CEST appears to have a direct impact on the decreasing pool of contract labour.

Andy Vessey, head of tax at Kingsbridge Contractor Insurance, commented: “HMRC was severely under prepared for the private sector reform, and CEST simply isn’t fit for purpose.

“However, there are some signs of positive change. There are more U-turns on blanket bans and contractors are optimistic about their future job prospects.”

In order to speed up change, three things need to happen according to Vessey:

1. More education to address the issues still being experienced.
2. CEST must be made fit for purpose.
3. Companies can legitimately hire contractors outside of IR35, but to do this, the use of purpose-built tools, advice and insurance should be sought.

Keep your eyes open for the next instalment of Global Payroll Question Time episode 4 in June, where the IR35 reform will be discussed in detail. You can catch up on episode 3 here.