• 50% of businesses reported that IR35, the UK’s anti-avoidance tax legislation, was the biggest obstacle to hiring contractors over the past 12 months

• More than 70% of businesses and recruiters have seen a drop in their limited company PSC contractors since the IR35 reform 

• Half of contractors in the UK have considered closing their businesses, retiring, or leaving the UK entirely due to IR35 reform

• 25% of contractors in the UK are seeking work abroad 

• The IT sector relies heavily on specialist contractor skills, with over 91,470 contractors and freelancers currently working in the industry 

• HMRC’s Check Employment Status for Tax tool (CEST) is not fit for purpose and is hampering businesses’ growth by blocking access to vital contract labour

One year on, it is clear that the confusion following IR35 reform is stifling access to specialised talent and is having significant ramifications for UK business growth.

This presents a major challenge for businesses in the IT industry, which relies heavily on specialist contractor skills. In fact, IPSE data suggests that there are 91,470 contractors and freelancers working within the sector.

New research by leading insurer and IR35 specialist, Kingsbridge Contractor Insurance, covers views from contractors, recruiters and end clients - businesses that work with contractors - including organisations in the IT sector.

The data shows that, despite Brexit and the COVID pandemic, IR35 was the biggest obstacle to hiring contractors over the past 12 months for 50% of the end clients surveyed. In fact, over 70% of businesses and recruiters reported that they had seen a reduction in their limited company PSC contractor workforce.

End clients and recruiters are struggling to place inside of IR35 roles – positions that are considered as ‘employees’ for tax purposes and therefore are likely to be taxed at a higher rate. More than 70% of contractors are looking only for outside IR35 roles over the next 6 to 12 months, despite these accounting for less than 41% of roles on offer. 66% of contractors have said they would not even consider an inside IR35 role.

As a result, nearly half of contractors have considered closing their businesses, and 25% have sought work outside the UK. The impact for the IT sector is restricted access to a much needed, highly skilled, flexible workforce. 

Another obstacle facing IT firms working with contractors is an increase in day rates. The research shows that 65% of contractors would try to negotiate an increased rate if placed inside IR35, with respondents suggesting that this could be up to a 25% increase.

This is already the case for many. 37% of contractors deemed inside IR35 have seen their day-rate increase in the last 12 months, compared to 20% of contractors deemed outside IR35. So, IT businesses are almost twice as likely to have to pay a contractor more to work inside IR35.

Paul Havenhand, CEO of Kingsbridge Contractor Insurance explains: “We have a unique position in the marketplace to be able to see the impact of IR35 from the different perspectives of contractors, recruiters and end clients. The UK economy is being hampered by a severe recruitment crisis, with many IT businesses struggling to fill vital roles. Contractors, as a highly skilled, flexible resource, could be providing a much-needed interim solution to keep things working and avoid major disruption to UK businesses. Yet the complexities of IR35 and perceived risks are putting businesses off.”

The research, which is the focus of a new whitepaper, IR35 – One Year On, reveals that 50% of recruiters feel that end clients were not well prepared for IR35 reform in the private sector. This suggests that further education is required. Too many companies are relying on CEST, despite its limitations, have adopted misguided stances of blanket bans, or are working with umbrella companies through fear of risk.

In fact, using CEST appears to have a direct impact on the decreasing pool of contract labour. 38% of the recruiters who stated their end clients use CEST have seen a 61% or greater reduction in their contractor pool vs 23% who use independent employment status tools.

Andy Vessey, Head of Tax at Kingsbridge Contractor Insurance and leading IR35 expert says: “HMRC was severely under prepared for the private sector reform, and CEST simply isn’t fit for purpose. However, there are some signs of positive change. There are more U-turns on blanket bans and contractors are optimistic about their future job prospects. To accelerate this change and avoid losing access to the skilled talent businesses need, three things need to happen:

1.    More education is needed to address the issues still being experienced. A better understanding of IR35 would be much healthier for the market as a whole

2.    CEST must be made fit for purpose and take Mutuality of Obligation (MOO) into consideration

3.    Companies can legitimately hire experienced contractors outside of IR35 but, to do this, the use of purpose-built tools, advice and insurance should be sought. This will provide the right process to mitigate against the perceived risks of hiring contractors.”

For more information about the research, download your free copy of the IR35 – One Year On whitepaper.