Almost nine in 10 businesses have been forced to increase rates of pay for contractors since IR35 rules were extended to the private sector in April.
A poll by Brookson Legal found that three-quarters have had to increase rates by more than 10%, more than double the average annual wage growth of 4.9% reported by the Office for National Statistics between July and September this year.
The reforms, which were introduced for public sector employers in 2017 and introduced this year to the private sector after being delayed by the pandemic, push the responsibility for determining a contractor’s employment and tax status onto the business rather than the individual.
At the same time, businesses are facing huge talent shortages and need access to flexible skills, particularly in areas such as haulage and logistics, where IR35 rules have been cited as one of the reasons behind the HGV driver shortage.
More than three-quarters of employers are now finding hiring flexible workers to be challenging or very challenging, according to Brookson. Despite this, 90% plan to extend their use of contractors over the next 18 months.
However, while around a third (31%) are concerned about unforeseen tax bills if they use contractors who appear to be outside IR35 but are then found by HM Revenue & Customs to be inside the regulations (and therefore liable for higher tax and national insurance), more are worried about costs and their ability to attract talent.
More than half (53%) cited contractor costs as driving their business behaviour over IR35, and 42% cited talent attraction. Forty-two percent also felt project delays had driven choices over whether to hire contractors.
Within businesses, the CEO takes responsibility for decisions on contractor recruitment in 56%, and the board in 24%. In others it is delegated to other departments.
Matt Fryer, head of legal services at Brookson Legal, said access to a talented flexible workforce was “vital to growth”.
“With job vacancies reaching an all-time high, presenting an attractive, compliant and competitive IR35 offer to talent is the best way to regain some control in an uncertain environment.
“It is also crucial to unlocking the benefits of a truly flexible workforce in the longer term. A robust and evolving IR35 solution will not only help companies recover and grow in the wake of the pandemic, it will ensure they are more agile and able to scale their workforce up and down to meet project needs.”
More than half (51.4%) of those polled by Brookson relied on the government’s Check Employment Status for Tax (CEST) tool to make status determinations, despite criticism that the tool delivers inaccurate status information.
Just over a third asked contractors to assess their own status, while 32.4% delegated the decision to recruitment agencies.
But Fryer warned that these approaches could be laden with risk. He added: “These approaches carry both the risk of tax liabilities from HMRC and can create barriers to growth if not used correctly, which will likely increase the cost of resourcing even further.”
Last week, a survey of 3,750 contractors by compliance platform IR35 Shield found that 47% of contractors had worked with companies where the use of contractors had been banned since the reforms were introduced.
A third felt IR35 reform would cause long-term damage to organisations, with many cancelling projects as a result.