How will the IR35 Reform disrupt the market?
With the delayed IR35 Private Sector reform only a few months away, I thought it would be a good time to discuss “How will this disrupt the contracting market?”.
The UK currently has over 2 million people who identify as contractors including those engaged on assignments through recruitment agencies and self-employed workers, this could have a massive impact on the UK’s productivity and ability to deliver major projects.
While a larger population of these contract workers will operate under a PAYE scheme HRMC predicts that the portion that works via a limited company model is still costing the UK tax system upwards of £1.3 billion.
So what could a post IR35 Private Sector reform look like?
Probably very different! HMRC believes that most limited company workers are not outside of IR35 and should be PAYE. A significant number of current contractors and clients will have some tough decisions to make.
Clients responsible for making status determination statements will undoubtedly err on the side of caution and could make blanket bans on limited company workers or make the criteria so strict for a contractor to be outside that very few actually qualify. While clients need to be compliant to remove the risk of penalties and investigations. Strict rules will reduce the number of contractors willing to work inside IR35 and will make attracting talent more difficult while the dust settles from the new changes.
On the flip side, clients may need to increase the rates to improve talent attraction and deliver on projects. Increasing rates will lead to higher costs per project and can cause budget-balancing issues. To help control costs client may try to replace contractors with permanent employees for key roles and re-organise the business process to encompass the new employees.
The contractors may find themselves too expensive for clients to engage with, as they seek to retain the same level of income from roles inside IR35 as they would have from roles outside IR35. This will lead to a limited number of opportunities available to contractors who want to work outside IR35. Tough decisions lay ahead as contractors choose to either accept a lower income or compete in a tougher marketplace.
Contractors may find that the best candidate for the job may not be the one with the higher skillset but the one that meets the budget.
Without a doubt, there will be an impact on the UK’s ability to deliver projects either on time or within budget as the market becomes accustomed to the new rules. Unlike previous years contractors would have sought work overseas and clients would hire talent from abroad to solve these types of challenges but that’s not so simple for the UK now.
Rest assured there will be turbulent times as both camps look to find a workable middle ground