The government has published a report into the short-term impacts of changes to the off-payroll working rules, also known as IR35.
The rules were changed in 2017 for public sector employers and 2021 for private sector businesses, and meant that responsibility for determining a contractor’s employment status shifted to the organisation rather than the individual.
The Treasury announced in its mini-budget in October that it would repeal these reforms, but then performed a dramatic U-turn just days later when new chancellor Jeremy Hunt said this would no longer go ahead.
The report, carried out by IFS Research, found that half of group-level and 48% of establishment employers thought it was easy to comply with the reforms, while only 24% found it difficult.
But Seb Maley, chief executive of contractor consultancy Qdos, thinks the report gives the wrong impression of the impact of the reforms.
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He said: “This research fails 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.”
IFS surveyed around 350 organisations at group level (part of a larger UK or global business where contractors are managed centrally) and establishment level (where contractor administration is carried out in individual establishments).
Just over two-fifths of group-level organisations (41%) had engaged fewer off-payroll contractors in September 2021 than in March 2020, while 35% engaged the same number. Almost a quarter employed more contractors than before the changes to the regulations were introduced.
Group-level companies similarly employed fewer contractors through personal service companies (PSCs) for 39%, while 37% employed the same numbers. More than half of establishment-level companies brought in fewer contractors via PSCs.
In both group-level and establishment-level companies, the majority of those reporting hiring fewer contractors said this was down to the reforms. Unsurprisingly, those that hired more said the reforms had not impacted them.
Many of the organisations involved in the research said they had onboarded contractors as employees to avoid the administrative burden of complying with the reform, while others said they had discontinued engagements. Others mentioned the impact of the pandemic on the use of contractors and associated budgets.
Around half of group-level companies made changes such as refining policies for engaging with contractors or implementing processes for worker status determinations, the research found.
Other adjustments included auditing their current contractor base and opening discussions with managers, agencies and contractors themselves. Almost two-fifths of establishment-level employers implemented adjustments.
A survey in September by IPSE, the body for independent professionals and the self-employed, found that 35% of freelancers had lost work since the introduction of the reforms, while many businesses have reported discontinuing contractor engagements due to difficulties with compliance.
Matt Fryer, MD of Brookson Group, part of People2.0, said it was essential for HR teams to read between the lines of the report.
“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 organisations 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,” he said.
Fryer argues that a significant number of contractors who have been moved to payroll as a result of the reforms may have had contracts incorrectly categorised as inside IR35 and are now paying unnecessary employment taxes. “HMRC seems keen to highlight that this represents just 2.5% of the total self-employed workforce and less than 1% of the total workforce. Is this an indication that the Government is content with the unfairness of this outcome?” he added.
He added that the report fails to show the shortcomings of the CEST tool and does not reflect how much organisations spent on compliance or the costs they would risk financially if they were found to be paying the wrong levels of employer tax and national insurance.
“Although only around 10% of end clients represent around a half of the total “compliance spend”, there seems to be no analysis in the report around compliance levels across businesses. This feels like a major oversight,” he said.
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