Since the IR35 reforms came into effect in April 2021, we have seen an increase in contractors moving away from self-employed to employed status. With the responsibility of determining contractor employment status now sitting with clients, we have seen many of them issuing blanket bans on the use of contractors, and our framework agreements with them reflect that. This blanket response seems to be changing and is now, to some extent, being reversed, with some clients perhaps pondering whether this rule may have precluded them from accessing the very best contractor talent.
2023-07-21 | Clare Allan
We decided to test what we’ve anecdotally noticed, and performed some analysis on our client base (mostly London-based wealth and asset managers and insurance companies). 17% of clients who preferred a ‘blanket ban’ on outside IR35 contractors have moved to an arguably more pragmatic approach, and now routinely perform CEST assessments on individuals to accurately determine their employment status.
We’ve also seen a change in contractors’ appetite to work on an inside IR35 basis. Back in 2021, many of our long-term contractors dissolved their limited companies and took permanent, fixed-term or inside IR35 roles. The reasoning behind this includes:
- An unwillingness to continue to concern themselves with tax affairs when outside IR35 roles seem few and far between
- A desire for the stability of a perm or fixed-term role in an uncertain market
- An unwillingness to risk HMRC investigation which could theoretically go back years
- Reluctance to undertake further administrative burdens, e.g. tracking potential substitutes, keeping tabs on personal working patterns, etc.
This could be coming full circle now that contractors are noticing a slight increase in the number of outside IR35 roles in the market. However, when approached about inside IR35 roles, the answer is a little more frequently: ‘No, thank you’. In fact, there is an increasing school of thought that it is merely a matter of time before a contractor legally challenges a company which has a blanket ban on outside IR35 engagements. Perhaps by unilaterally refusing to perform a CEST assessment, a company is derelict in its duty of determining the contractor’s status?
In my view, while this change in view is in many ways a step forward for the contracting market, it still remains to be seen as to what action HMRC will take. As it stands, HMRC does not have to give a reason for opening an enquiry, an IR35 investigation, or an off-payroll working rules enquiry, so there is no way of understanding exactly what provoked the Revenue’s scrutiny.
What we need to remember is that HMRC has access to a huge database of information to aid them in their goal to ensure every taxpayer in the country contributes the right amount of tax to the pot. As contractors clearly aren’t an exception, it will be interesting to see how the contractor market will evolve over the coming months.
