IR35 reforms: Contractors weigh up post-April 2021 employment options

The contractor community does not feel confident in the ability of the private sector clients it engages with to accurately determine how they should be taxed once the IR35 reforms come into play on 6 April 2021.

With six months to go until the tax avoidance reforms are extended to medium-to-large private sector firms, IR35 consultancy Qdos quizzed 750 contractors on what their career plans were beyond April 2021.

From this date, medium-to-large private sector firms will assume responsibility for determining how the contractors they engage with should be taxed, based on the work they do and how it is carried out.

Presently, it is up to contractors to self-declare whether or not they should be taxed in the same way as permanent employees (inside IR35) or as off-payroll workers (outside IR35), and the results of the Qdos survey suggest the forthcoming shift in responsibility is not to everyone’s liking.

So much so, 75% of respondents said they lacked faith in the ability of their clients to accurately determine how they should be taxed, while 21% said they were undecided on this point. The remaining 4%, however, said they believed their clients would correctly determine how they should be taxed.

A long-held concern of limited company contractors is that if they find themselves on the receiving end of an incorrect inside IR35 tax status determination, for example, they will be liable to pay the same level of employment taxes as permanent employees. However, while they would be expected to pay the same amount of income tax and National Insurance Contributions (NICs), they are not entitled to the same benefits – such as paid sick leave and holiday – as an on-payroll employee would receive.

In light of these misgivings, just under half of those surveyed said they intended to carry on contracting beyond April 2021, whereas 17% said they would consider taking a permanent contract and become an employee to side-step the reforms.

Nearly a fifth (18%) said they expected to close down their limited companies and cease contracting from April 2021, a further 6% said they would be open to the idea of retiring, and 14% of those questioned said they had “other plans”, with launching a new business venture cited as an example.

Seb Maley, CEO of Qdos, said the results also showed that more than 90% of contractors were keen to continue engaging with clients as limited company or personal service company contractors after April, but many of them recognised this might not be possible.

“My advice to businesses planning to ban contractors in response to IR35 reform is to think again. In this economic climate, companies desperately need the skills, flexibility and savings offered by contractors”

As previously reported by Computer Weekly, the reforms were due to come into play in April 2020, but the start date was pushed back due to the onset of the Covid-19 coronavirus pandemic.

However, during the six months to April 2020, there were numerous reports of medium-to-large private sector firms seeking to bypass their responsibilities by setting out plans to ban the use of limited company contractors once the reworked IR35 rules came into play.  

“While nearly all contractors want to carry on working via their personal service company when reform arrives, not all independent workers believe they will be able to,” said Maley. “This is likely to stem from their experience in the public sector and from blanket and risk-averse decisions already made by private sector firms.

“This means contractors are understandably split over their future, despite many not having had their IR35 status determined yet. I should stress, however, that there is a lot of positive work happening behind the scenes. In our experience, thousands of businesses are approaching IR35 reform quietly and pragmatically, ready to compliantly engage contractors outside IR35 when the changes land. 

“My advice to businesses planning to ban contractors in response to IR35 reform is to think again. In this economic climate, companies desperately need the skills, flexibility and savings offered by contractors. IR35 reform may be needless and very short-sighted, but it is manageable,” said Maley.