Report slams Off Payroll reforms, survey shows major IR35 impact

Just over a year since the introduction of the Off Payroll rules in the private sector, the Public Accounts Committee has released a damning report on the implementation. A new contractor survey backs up the findings.

IR35 reform – a ‘rushed implementation’

Despite widespread warnings of the damage the rollout could cause, and implemented in the middle of the Pandemic, the new rules marked a fundamental change to how ‘IR35’ operated beforehand. (from the year 2000 onwards).

Rather than contractors being responsible for operating IR35, it is now clients who have been forced to take on the responsibility of determining the employment status of workers. The changes had previously been rolled out across the public sector in 2017.

In a report, released this week, the PAC was highly critical of how the Off Payroll reforms were introduced, stating that HMRC ‘rushed implementation of the reforms’ and ‘provided poor guidance’.

IR35 biggest concern for contractors during 2021

A survey of over 1000 contractors, carried out by Parasol, shows the dramatic impact the changes have had on the industry. Respondents were fairly evenly mixed between limited company and umbrella contractors.

IR35 was identified by the majority (55%) as being the single biggest challenge during 2021, followed by 25% who saw finding new clients as the biggest burden during the year.

Of those contractors who had been affected by the Off Payroll rollout, over 80% reported ‘negative’ or ‘very negative’ experiences.

Huge numbers of contractors forced to use umbrella companies

Many clients, rather than taking on new legal responsibilities, have opted to stop hiring limited company contractors altogether.

This practice was identified in the PAC report, as follows:

“… some contractors report that, to avoid perceived risks of failing to comply, their clients are changing hiring practices – such as no longer engaging workers through personal service companies.”

This means that many are now working via umbrella companies, where they are taxed like employees, but without receiving any of the rights associated with employment in general.

In fact, 82% of umbrella contractors who took part in the survey, had joined an umbrella company as it was a requirement of the end-client.

Unfair client assessments, no right to appeal

The PAC report also identified the lack of appeal by contractors as being a particularly big problem:

“No appeals process means it’s too difficult for workers to challenge incorrect determinations.”

According to the Parasol survey, 40% of contractors said that their client had unfairly assessed their IR35 status. Overall, just one in three contractors trusted their client’s assessment.

Many respondents also alluded to ‘blanket IR35 determinations’ – the practice of forcing all workers to use an umbrella company rather than their own limited companies.

PAC lessons from the botched April 2021 rollout

In its full report, the PAC made the following conclusions about the IR35 reform implementation:

• There are high levels of non-compliance with IR35 within the Government’s own departments. The online employment status tool – CEST – comes in for particular criticism (it simply doesn’t work properly).
• It is too difficult for contractors to challenge status determinations (there is no independent route to appeal).
• HMRC simply doesn’t understand the effect of IR35 on the labour market. It needs to particularly focus on sectors which have been disproportionately affected by the rules.
• There are still significant structural problems with how IR35 operates, over 20 years on.