A new survey measures the impacts of IR35 and Off-Payroll Working reforms. It shows that in terms of their current engagements, two-thirds of professional contractors still favour working via the established model of a Personal Service Company. There is also good news for HMRC: its Check Employment Status Tool is giving acceptable results for contractors.
The survey of 1,447 highly-skilled professionals was conducted last Spring by The Association of Independent Professionals and the Self-Employed (IPSE).
Reading between the lines, the recent changes to IR35 and Off-Payroll Working seem to have had quite a limited effect for those working for the private sector.
On average, contractors have worked on two engagements over the last 12 months: 82% were with private sector clients, and 18% were with the public sector.
62% of contractors are working via their own Personal Service Companies (PSCs), whilst 30% are engaged via Umbrella companies, with just 7% on Agency contracts and only 2% on a client's payroll.
Looking at the IR35 status of engagements over the last 12 months:
- 20% of all engagements in the private sector were determined as inside IR35, with 80 per cent determined as outside IR35. Of these 28% were with a client that is legally defined as a small business and therefore exempt from the requirement to assess the IR35 status of an engagement and 18% were with clients based wholly overseas and therefore also exempt from IR35.
- 25% of engagements in the public sector were determined as inside IR35 with 75% deemed outside IR35.
A Status Determination Statement (SDS) must be provided to the contractor for every contract that is agreed, based on the outcome of an IR35 assessment. From 6 April 2021, medium and large-sized businesses have been legally required to carry out the IR35 status determination and provide an SDS to all contractors.
Despite these being legal requirements for medium and large-sized businesses, three-fifths of contractors (60%) reported that their client had not provided them with an SDS. IPSE says that this represents a significant increase on their findings from 2021 where just 38% of contractors had not been provided with an SDS.
For the contractors who were provided with an SDS, 82% of these agreed with the IR35 status determination. It's good news for HMRC, as this represents an increase from findings of just 69% in previous years.
53% of contractors indicated that they have rejected an offer of work in the last 12 months solely because the client deemed the engagement to be inside IR35.
24% reported that they have been asked or were required to agree to an indemnity clause to protect their engager from the costs of an HMRC investigation.
Checking employment status
- Almost two-fifths of contractors (37%) indicated that their client used the CEST (Check Employment Status for Tax) tool to determine their Employment Status for IR35 of their current engagement: a notable increase on the research from 2021, where 18% of engagements were determined in this way.
- 34% reported that their client had used a third-party company to assess their IR35 status which is a significant increase on IPSE's findings from 2021, where just over a fifth (21%) reported the IR35 status of their engagement had been determined in this way.
- Just over one in ten contractors (12%) reported that their client used A tool or piece of software other than the CEST tool to determine the IR35 status of their engagement. This represents a significant increase on the findings from 2021, where just six per cent of contractors reported this.
- 11% of respondents understand that their client has determined all engagements to be inside IR35 – a blanket assessment.
- 9% of contractors reported that their client made the IR35 assessment themselves without using any tools or software.
- 6% indicated that their contract was advertised as being inside IR35.
- Only 2% of respondents indicated that their client insisted they work on payroll without assessing the IR35 status of the engagement – a blanket ban.
Overall, IPSE concludes that the research now indicates that whilst clients have perhaps eased their initial blanket approach to assessments and blanket bans to those working through a limited company in the aftermath of the rule changes in 2021, contractors are now more likely to be actively searching for clients exempt from the IR35 rules.
What are the long-term impacts?
In order to understand the long-term impact of the IR35 reforms in the private sector, IPSE asked contractors how they intend to operate over the next 12 months.
Over three-fifths of contractors (62%) reported that they intend to continue to work as a contractor only if they can find contracts that are deemed to be outside IR35.
29% indicated that they intend to only work as a contractor for small clients who are exempt from making IR35 determinations and 22% of contractors intend to work as a contractor regardless of their IR35 status.
Just over a fifth of contractors (22%) intend to seek contracts abroad (see our Digital Nomad workshop).
Just 12% of contractors intend to work via umbrella companies, whilst 7 per cent intend to work as an employee and another 7 per cent intend to retire.
Useful guides on this topic
Off-Payroll Working: at a glance
What is Off-Payroll Working? What is IR35? What are the tax rules for Off-Payroll Working or IR35? How do you check employment status? What is a personal service company?
Personal Service Company (PSC)
Subscriber guide: What is a PSC? What are the tax implications for a PSC and its owners?
Working through an agency or an umbrella company
Working via an agency: how to spot whether you are being paid correctly. This guide shows you what to expect.
IR35: Off-Payroll Working
What is IR35? How does it work? How is the deemed payment calculated? What expenses are deductible?
Becoming a Digital Nomad?
Looking for a different kind of work-life balance explore your options in our Digital Nomad workshop
HMRC employment status tool (CEST)
This tool can be used by workers, agencies and engagers in order to determine whether a worker is employed or self-employed for tax purposes.
Employment status: detailed checklist
Check your own employment status against case law
External links
IR35 Spotlight 2023: Insights from the UK's contracting sector
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