IR35 reforms: the good, the bad and the ugly

The IR35 tax reforms that hit the private sector in April 2021 have caused a major shakeup not only for contractors, but also for the employers and recruitment agencies that work with them.

Contractors now have to let their clients determine their IR35 status; employers have to carry out these assessments for every contractor they work with; and if they come to the wrong decision, it’s often recruitment agencies who are liable.

But is there an upside to all this?

The Good

Believe it or not, IR35 isn’t all bad. While many businesses have deemed all their contractors “inside IR35” regardless of their actual status and forced them onto the payroll, thousands of companies are handling the reforms correctly and are still engaging genuine contractors outside IR35. 

Qdos research back in April found that one in three contractors had been classed outside IR35 by their client, and now that the dust has settled, it’s likely to be at least one in two.

The Bad

However, there’s still a lot of room for improvement. The vast majority of contractors are genuinely self-employed and should be outside IR35. Too many companies are insisting all contractors either go on the payroll or work via an umbrella company, on pain of having their contracts cancelled.

While businesses may see this as the fastest, easiest and lowest-risk response to the changes, putting genuine contractors on PAYE is actually much more expensive and will kill a company’s ability to attract top flexible talent–just as this is becoming a major factor in staying competitive. It’s an unnecessary and costly decision.

The Ugly 

While there are several ugly sides to IR35, from the government’s dodgy approach to enforcing compliance to the lack of reliable HMRC guidance for employers and recruiters, the ugliest of all is CEST, HMRC’s IR35 assessment tool. It’s fundamentally flawed. 

CEST was used over 1.1 million times between November 2019 and August 2021, yet failed to give an answer on IR35 status about 21% of the time, leaving over 233,000 contractors and companies in uncertainty. Despite intense pressure from the industry to improve CEST, HMRC insists that it’s fit for purpose.

Hopefully, all these issues will be discussed at the upcoming Lords IR35 inquiry, a follow-up to the 2020 report, Off-payroll working: treating people fairly. While the IR35 situation is not all bad, there’s still plenty of work to do before every business has the processes in place to ensure and maintain IR35 compliance.