Response to the IR35 Changes

April 2021 saw the much-anticipated roll out of the IR35 changes into the private sector. Whilst there had been a significant lead time for end hirers and their supply chain to make adequate preparations there was still a large proportion of the market that was not ready for the changes or rushed in place inadequate processes in an attempt to comply. Having said that we have also seen a pleasing number of end hirers take appropriate steps to manage their risk and apply the rules correctly and fairly.

What does good look like?

Lets’ start by considering how HMRC estimated the levels of non-compliance in the market.  HMRC estimated that approximately 1/3 of contractors were not applying the old rules correctly.  You would therefore expect circa 66% of roles to be outside of IR35.  Based on 10s of thousands of IR35 reviews undertaken by Brookson Legal on behalf of 100s of end hirer clients over the last few months we are currently running at a 71% outside IR35 rate with 29% inside IR35. It therefore appears that HMRC were not too far off with their estimates.  If you compare the outputs from HMRC’s CEST tool, the results are similar.  CEST has produced 29% inside IR35 and 51% outside of IR35 (there are however 20% of CEST reviews which have come back as “undetermined”).

Clearly there will be sector variances, but it is not unreasonable to conclude from these stats that businesses which undertake IR35 status reviews for their off-payroll roles (remembering to ensure they take reasonable care) will limit any disruption to only circa 30% of their off-payroll workforce.  Those end hirers who have taken a blanket ban approach or defaulted to all roles being inside IR35 without investing the time to check will experience disruption to 100% of the off-payroll workforce.  These statistics make a very clear business case for end hirers to apply the rules correctly.

Risk management – what is the risk here?

Essentially, the response to the IR35 changes is a risk management issue. The primary risk that an end client must manage to comply with the new rules is to ensure that it undertakes a status determination and issues a status determination statement and in doing so takes “reasonable care”.  That’s it.  Get this right (and embed processes as business as usual for ongoing status determinations for existing and new roles) and you are home and dry.

The alternative is to remove PSCs from the supply chain.  This removes the IR35 risk but opens up other risks which need to be managed, which in my view are more onerous and potentially more costly.  These risks include:

  • Monitoring how these workers are now paid, what new payment intermediaries have entered the supply chain and how do they comply with associated legislation – risks here include Criminal Finance Act, Managed Service Company Legislation, Onshore and Offshore intermediaries’ legislation to name a few.
  • Considering the implications from an employment law perspective – as these workers are no longer afforded the opportunity to work as self-employed, they will automatically be subject to the agency workers regulations which requires equality in pay and benefits when compared to permanent staff. The individuals will likely to now be employed by somebody and therefore entitled to holiday pay, WTR, sick pay, redundancy pay etc. This all needs to be transparent, properly funded and properly administered. Many of the impacted contractors will feel aggrieved by the position they have been put in and litigation does not seem an unreasonable risk to crystallise in the future.
  • Commercial implications – incorrectly assessing or forcing a contractor to have PAYE deducted from their earnings means someone in the supply chain will need to fund the additional employer costs. This could be via the end hirer paying an increased rate (this has happened in some instances), the agency reducing some of its margin (this is rare) or the contractor taking home less money (this is more common).  This creates a commercial pressure which may result in challenges in securing contract resource and an appetite for the supply chain to “soften the blow” by seeking out ways to reduce the cost, which may result in non-compliance, thereby crystallising some of the other risks referenced above.
  • Reputation and operation risks – including being perceived as restricting the flow of off-payroll talent into your business and resulting delays to critical projects due to loss of resources.

The case for blanket banning is not in my view a very good one when the risks are fully considered.  We are already seeing some clients take a more balanced approach to IR35 risk management and expect others to follow as they start to understand the risk profile of their options.

What next?

The new IR35 rules are here to stay and there is now an ongoing requirement on flexible labour supply chains to continue to meet their new obligations.  It would now be a prudent time for businesses to assess their response and consider the risks in light of the issues raised above.  Policies and procedures will evolve, and best practise will start to emerge.  Those who continue to spend time refining their approach have a short to medium-term opportunity to capitalise on the changes, attract the best talent and access the benefits that come with embracing a flexible workforce.


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