Contractors claim IR35 reforms pose ‘bigger threat’ to their livelihoods than Covid-19 or Brexit

The contractor community fears that extending the IR35 tax avoidance reforms to the private sector poses a greater threat to their businesses than the Covid-19 and Brexit combined, research shows.

According to a poll of more than 750 contractors carried out by IR35 compliance consultancy Qdos, 62% name-checked the reforms as their “biggest” source of business concern for the year ahead.

Meanwhile, 33% predicted that the Covid-19 pandemic will pose a bigger threat to their business over the next 12 months, while 5% said they think the UK’s exit from the European Union will do more damage to their business prospects than anything else.

“While Covid-19 poses an imminent threat to contractors, most of whom all but miss out on government support packages, it is the IR35 reform that independent professionals are most concerned about,” said Qdos CEO Seb Maley.

The IR35 reforms, set to come into force in April 2021, will see contractors relinquish control for determining how they should be taxed to the medium to large private sector firms that engage them.

Within the private sector, it is down to the contractors to decide whether the work they do and how it is performed means they should be taxed in the same way as salaried workers (inside IR35), so liable for PAYE and national insurance deductions, or as off-payroll employees (outside IR35).

Similar changes were rolled out across the public sector in April 2017 in a bid by HM Revenue & Customs (HMRC) to clamp down on contractors using the system of self-declaration to deliberately mis-classify their working arrangements to minimise their employment tax liabilities.

The private sector IR35 reforms were originally on course to be introduced in April 2020, but the start date was put back 12 months because of the coronavirus pandemic.

In the six months to April 2020, Computer Weekly received numerous reports of private sector firms responding to the impending shift in responsibility by taking steps to wind down their reliance on limited company and personal service company contractors as a way to side-step the reforms.

Now, with five months to go until the delayed April 2021 start date, Maley said there are signs that some private sector firms are again gearing up to start ditching their contractors in preparation.

“Some contractors have been told by risk-averse clients that they will no longer engage with them as contract workers, giving them no choice but to work on the payroll or face having their contract cancelled,” he said. “This is a short-sighted, unnecessary and, in some cases, a non-compliant approach that should be avoided at all costs.

“With less than five months to go until IR35 reform, the onus is on hiring organisations and recruitment agencies to prepare for the changes. Contrary to speculation, IR35 reform is manageable, but the work must start immediately.”

Either way, the Qdos data suggests that nearly half of contractors (45%) plan to continue working in this way, while 17% said they intend to seek permanent employment instead and 19% said they plan to close down their limited companies in due course.