IR35 will force out half of contractor workforce

Half of contractors plan to leave clients in the next eight weeks thanks to changes to the IR35 ‘off-payroll’ rules – and for many it is affecting their mental health – according to contractor accounting firm inniAccounts.

The company claims that the exodus of contractors will cost the economy £2.2bn (based on the number leaving, the length of time it will take to replace them and the average day rate), with almost two-thirds of projects in the banking sector affected, and almost three-quarters in defence and aerospace at risk.

According to research carried out by Offpayroll.org, a site set up by inniAccounts for contractors to share their experiences, 23% have been “banned by clients without assessment”, 28% are still waiting to find out their status, and only 9% have been deemed outside IR35.

Almost a third of contractors (31%) complain it is affecting their mental health and are experiencing anxiety, and almost one in 10 use self-employment as a way to cope with their own disability or illness, so are fearful of a change in circumstances. Fifteen per cent said they were either in the process of selling their property or were about to default on their mortgage.

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Last week, HMRC confirmed that the changes to IR35 legislation for the private sector will now only apply to payments made for services provided from 6 April 2020. Previously, the rules applied to any payments made on or after 6 April, regardless of when the services were carried out.

But despite the minor delay to their introduction, employers and contractors alike have been critical of the reforms, which shift the responsibility for establishing employment status for tax to the employer, when the onus had previously been on the contractor, who would also be liable for paying the correct levels of tax and National Insurance.

Just over half of contractors (52%) replying to inniAccounts said their likely next course of action would be to leave immediately, around 10% said they were prepared to take a permanent role, 18.5% said they would stay in the short term and 4% planned to move overseas.

Stressed, depressed and demoralised

One respondent to the site said he was “very stressed, depressed and demoralised”.

“I have worked hard to build a business and work will multiple clients at the same time all of which have now cancelled my contracts. I have five kids and a wife that can’t work – I do not know how I will survive after April. I am now out of work,” he said.

Another said they were “treated like a criminal” and was considering early retirement.

Over three-quarters (77%) felt that the current blanket approach adopted by many employers – particularly in the financial services sector – would soften as hiring managers struggled to find the right skills to complete important projects.

Almost half (47%) of self-employed respondents said they had seen their client organisations turn to offshoring as a result of HMRC’s reforms, with 10% saying this is happening to “hundreds of roles”.

Only 13% of those surveyed said they had been provided with a status determination statement, a requirement of the new rules, and 47% said they were unclear how their determination was made. Only 6% thought the process was clear and transparent.

Where contractors had been found to be inside IR35, and therefore subject to the same taxes as permanent employees, around a third expected a reduction in take-home pay of 21% to 30%. Seventeen percent thought they would lose more than 40%. Almost a third had taken out tax insurance policies as they were concerned they could face a retrospective tax investigation.

James Poyser, CEO of inniAccounts said: “Taking the stance that contractors will stay on your terms because there is no alternative is short-sighted.

“The majority of contractors are engaged in project delivery so they are well aware of the impact their decision to leave will have on the business and they are not afraid to vote with their feet and let it happen. Nor are they afraid to emigrate abroad and take their skills to countries where they are wanted.

“Ultimately, they don’t want to be forced into a position whereby they are denied their right to be self-employed, and instead be pushed into false employment with no benefits or rights because the company is running scared of HMRC.

What’s more, in the grand scheme of things, they will pay far less in tax than they are today. Investors, regulators, HMRC and stakeholders will be facing utter jeopardy if this reform is not halted and thought through properly.”

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A government review of the extension of the new IR35 rules to the private sector is due to conclude mid-February, while a House of Lords select committee has launched an inquiry into the legislation.

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