IR35 private sector reforms: Research suggests 75% of contractors will leave posts by April 2020

The fallout from the IR35 tax reforms being extended to the private sector has been laid bare in new research that suggests a mass walkout of contractors could be on the cards within the next eight weeks.

That is according to research by the OffPayroll.org.uk website, which allows contractors to share feedback anonymously on how their clients are responding to the change in responsibilities the incoming IR35 reforms will impose on them.

Based on a poll of more than 1,500 of the site’s users, 75% of those surveyed said they plan to leave their current role immediately or move overseas for work, in direct response to the reforms coming into play on 6 April 2020.

As a result of these walkouts, 85% of respondents said they do not think their clients have sufficient backup plans in place to plug the gaps in their workforce, with 52% claiming the number of contractors that are set to walk out has been greatly underestimated by private sector firms.

“Projects are predicted to fail to meet regulatory deadlines, leading to fines, hefty penalties for late delivery, and are putting revenue and reputation at risk,” says the research. “And only one-sixth say the board is starting to pay attention to the ramifications.”

From 6 April, medium to large private-sector organisations will become responsible for determining how the contractors they engage should be taxed, based on the work they do and how it is performed.

Previously, it was down to contractors to decide whether they should be taxed, based on the work they do, in the same way as permanent employees (inside IR35) or as off-payroll workers (outside IR35), with the latter designation enabling them to minimise their employment tax liabilities, from a national insurance and pay-as-you-earn (PAYE) perspective.  

According to HM Revenue & Customs (HMRC), enabling contractors to self-declare their tax status has led to some individuals misclassifying themselves as outside IR35 to reduce their tax liabilities when the work they do means they are performing the same job role as a permanent employee, and should be taxed as such.

As detailed in Offpayroll.org.uk’s research, about 45% of organisations within the scope of the reforms are taking a blanket approach to assessing the tax status of their contractors, which means contractors are either being phased out of their workforce completely or having their outside-IR35 contracts incorrectly reclassified as inside.

In response to this, contractors have either terminated their engagements already or are planning to do so by the end of this month, for several different reasons outlined in the research.

Of utmost concern is the risk associated with switching from an outside to an inside IR35 contract when performing the same role at the same company, with 91% of contractors saying they fear that doing so could put them at risk of an investigation by HMRC later down the line.

As previously documented by Computer Weekly, HMRC has lost a succession of IR35 cases it has taken to tier one tribunals before, but the costs involved with having to do battle with the taxman in court is a financial risk that contractors are keen to avoid.

Of those questioned, 45% said that if they were subject to a retrospective investigation by HMRC into their tax affairs, they had no idea how they would manage financially, and a quarter said they would have to declare themselves bankrupt. A further 12% said they would have to sell their house or use savings.

As well as the fear of retrospective investigations, 85% of individuals said they were leaving because they had sufficient money saved up within their limited companies so they could temporarily stop working and live off their cash reserves.

Anecdotally, this approach is being favoured by contractors who want to wait and see how the market stabilises once the dust settles on the IR35 reforms, and take their time over finding outside-IR35 engagements.

If no such opportunity arises and they end up taking a permanent role or an inside-IR35 position, a break in employment is often considered to provide enough breathing space between their last engagement, so that HMRC should have no grounds to query why the contractors are no longer working outside IR35.

On this point, 44% of contractors said they felt so confident that the work they do and how it is performed means they are outside IR35, that they are not willing to continue working for private sector organisations that are enforcing blanket bans.  

But for those contractors who are unable to turn down work and face having to accept an inside-IR35 role, the majority are anticipating a pay cut, with 63% saying they expect to see their take-home pay decrease by between 21% and 40%.

James Poyser, CEO of contract-focused online accounting firm InniAccounts, and founder of OffPayroll.org.uk, said the research highlights the “grave implications” that the “fundamentally flawed” IR35 reforms could have for the contractor community and the UK economy.

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