Further to our previous article, two new reports have found that the IR35 extension implemented back in April this year has had the devastating impact upon the economy that many had feared prior to it taking effect.
IR35 Extension
With effect from the 6th April 2021, IR35 was extended to businesses with 50 or more employees in the private sector. This followed its earlier implementation into the public sector on the 6th April 2017.
A full explanation of what IR35 (aka the off-payroll working rules) is, is set out here and here.
Many predicted in advance of the IR35 extension that it would be “catastrophic for the economy“, with a survey by Harvey Nash Recruitment Solutions having already found that its introduction into the public sector had had a devastating impact there.
The Government’s objective behind the IR35 extension was to clamp down on what is referred to as ‘disguised employment’, where those who are in reality employees are made out to be self-employed contractors, often using personal services companies as a vehicle, so as to avoid paying the additional taxes and national insurance contributions that come with being an employee.
With the introduction of the IR35 extension, those managed and directed in how they carry out their duties and responsibilities, and who use the equipment of those that have hired them, will be deemed to be employees and they must now go on to the PAYE payroll.
Nevertheless, critics of the IR35 extension argue that the changes have undermined the UK's flexible economy, in that previously the use of contractors who could be taken on and let go as and when required, made the resourcing and implementation of projects more viable and manageable. This is no longer possible under the new rules, thereby making projects more expensive and risky.
Critics also point to the problems encountered with the Check Employment Status for Tax (CEST) tool, widely regarded as defective, with 42% of assessments found to be inaccurate. Indeed, the Government has been humiliated 3 times over the last 6 months on account of IR35 failings by the Government's very own departments and agencies, failings which have all been traced back to the deficiencies of the CEST tool. As a result of those failings, HM Courts & Tribunal Service (HMCTS), the Department for Work and Pensions (DWP), and the Home Office, have all had to pay out many million of pounds in tax arrears, and interest on those arrears
In a report published by ContractorCalculator, they found that CEST was “not fit for purpose” and “hopelessly unreliable and biased.” Indeed, Philip Manley, the co-author of the report, and a former HMRC inspector, stated: “Unless HMRC can disprove the substantial evidence demonstrating CEST’s shortcomings, then it’s clear that CEST is not fit for purpose.”
New Reports
With the IR35 extension having now been in place for over 6 months, IR35 Shield have just published the results of a new survey of 3,750 contractors to assess its impact. The results of this survey show that the impact has been utterly disastrous for the economy.
The IR35 Shield survey found that:-
- 47% of the contractors reported that some of the firms that they had previously worked for had now completely banned the use of contractors altogether, having chosen to adopt a safety first approach. 65% of the contractors stated that some firms had reduced their use of contractors by more than 50%
- 58% of the contractors divulged that some of the companies that they had once worked for had got around the problems created by the IR35 extension by simply moving the work abroad.
- 35% of the contractors disclosed that some firms have completely cancelled projects due the IR35 extension
A separate report from the Association of Independent Professionals and the Self Employed (IPSE) found that 70.8% of freelancers reported that the IR35 extension had had a more detrimental impact upon them than either Brexit or the Covid-19 pandemic, with 35% of freelancers confirming that they had abandoned self-employment altogether.
The CEO of IPSE, Derek Cribb stated: "Clearly, the government needs to reevaluate the IR35 rules in light of the disruption and uncertainty they are causing business."
On the 30th November 2021, the Government launched a consultation in relation to umbrella companies
