UK Govt Study Says IR35 Contractor Tax Reforms Plain Sailing For Most

Updated Two-fifths of organizations hired fewer off-payroll staff under the new IR35 rules in September 2021 than in March 2020, according to research published by UK tax collector HMRC, yet critics claims the findings fail to measure the true impact of the reforms.

The study was based on 353 interviews between November 2021 and April 2022. It showed that among larger organizations, 41 percent said they'd engaged fewer off-payroll contractors than they did in March 2020. Thirty-five percent hired the same number of off-payroll folks while 23 percent took on more. Nearly half (47 percent) of establishment-level organizations – which only manage their own tax affairs – had the same number of off-payroll contractors in March 2020 as they had September 2021.

However, critics were quick to point out that the way the data was selected could skew the official results – with the impact being much greater than recorded.

IR35 reforms were introduced for businesses in April 2022 following a year's delay caused by the COVID-19 pandemic. They put the onus on determining tax status on employers, some of which were unwilling to accept the risk and put blanket bans on the use of contractors. The rules were introduced in the public sector in 2017.

You can learn more about the context and the background for IR35 here.

Carried out by IFF Research, the HMRC study failed to paint a true picture of the disruption of IR35 because many organizations had already made their IR35 decisions in March 2020, before the last-minute COVID-related delay, said Dave Chaplin, CEO and founder of tax compliance firm IR35 Shield.

"Many of the comparative figures in this report are flawed. This is because on 18th March 2020, at the first reading of the Finance Bill, [the government] announced that the Off-payroll reforms would be delayed by a year. With only three weeks until the expected roll-out date, most firms had already changed their workforces. Therefore, the periods compared in this report of March 2020 to September 2021 do not provide an accurate picture of the before and after scenario.

"Choosing March 2020 as the baseline is somewhat of a statistical howler and means the report paints a less disruptive picture than what occurred in reality. Even then, though, it's not pretty reading for HMRC."

Chaplin also pointed out HMRC originally estimated that the one-off impact on the administrative burden to 60,000 businesses would be £14.4 million and that the ongoing cost would be negligible. But the new report says the average cost per firm would be just over £4,000, making the total cost for 60,000 firms around £240 million, 17 times more than HMRC's estimate in its impact statement.

"This annual cost to UK business demonstrates considerable friction has been added to the flexible workforce, which will cost UK Plc. Questions need to be asked in Parliament as to why HMRC got this so wrong," he said.

Matt Fryer, managing director of freelancer platform Brookson Group, said: "Our concern is that a third of businesses working with contractors have spent little or nothing on ongoing costs to comply with the rules.

"Furthermore, over half of organizations said that all of their contractors fell entirely outside or inside the rules, but in our extensive experience of expert reviews, this is very rarely the case."

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Seb Maley, CEO of employment insurance firm Qdos, said the HMRC research failed to tell the full story of IR35 reform. "Read this report and you'd think that the off-payroll rules have been plain sailing. It's another government study to add to the growing pile of those which fail to reflect the reality of the situation.

"We're being told that half of businesses have found it easy to comply with the off-payroll rules and that around eight in 10 firms assess IR35 status on a case-by-case basis. These statistics paint a nice picture, but I would take them with a pinch of salt. True, more businesses are getting to grips with these rules, but it's been a difficult journey."

IR35 even played a bit part in the UK's political melodrama this year. During his brief stint as chancellor of the Exchequer, Kwasi Kwarteng promised to abandon the reforms. The promise did not outlive his tenure – or that of prime minister Liz Truss. Jeremy Hunt – who replaced Kwarteng as chancellor in October – said he would reverse the repeal of IR35. ®

Updated to add:

An HMRC spokesperson said: "It is nonsense to assert most businesses had changed their workforces by March 2020. Our analysis shows only 20,000 of the 130,000 workers identified who changed the way they work due to the 2021 reform had done so by March 2020."

They also said: "This reform has succeeded in improving compliance with the off-payroll rules, with more people who work like employees paying tax like employees, levelling the playing field for everybody else and bringing in the tax that is due under the law."