Two thirds of contractors operating outside IR35

As IR35 reform in the private sector approaches, nearly two thirds of contractors (63.9%) who took part in the annual Optionis Contractor Survey have said their current or most recent contract is not or was not inside IR35.

While you may expect this to be the case, given contractors will continue to determine their IR35 status in the entire private sector until April, the vast majority of those surveyed were assisted in reaching this conclusion. This suggests most contractors sought a second opinion before setting their IR35 status.

You might be wondering why this matters. It’s important because in just a few months, on 6 April 2021, contractors will no longer be responsible for assessing their IR35 status in the private sector, unless the end client qualifies as a small company. Instead, medium and large businesses will assess status, with the fee-paying party in the supply chain tasked with deducting employment taxes and paying these to HMRC should the assignment fall inside IR35. 

Above all else, this research paints a positive picture. It shows that contractors understand the perils of working under the wrong IR35 status and are therefore seeking advice to ensure compliance. In doing so, this contributes to ‘reasonable care’, which HMRC states must be taken when determining IR35 position. 

With the reform now just months away, that contractors often carry out their own due diligence before setting their status is something that businesses should bear in mind. After all, from April it will be medium and large companies, similar to all public sector organisations, that must carry out compliant IR35 status assessments.

Many contractors are optimistic

While the challenges surrounding IR35 reform are well known, that’s not to say contractors do not have any faith in their clients. For example, one contractor working in the public sector, where reform was rolled out in 2017, said: “I am outside of IR35, as are all of my fellow contractors. The client realised that if they forced us inside they wouldn’t be able to function or deliver the service promised.”

Another said it is “business as usual”, with others sharing the view that they will be able to work outside IR35 in due course: “For genuinely self-employed contractors there will remain outside IR35 roles. It may take time but I think the market will have to adjust. Highly skilled sought after contractors will always be in demand.”

There is work to be done

But not all contactors are as convinced, namely those who have been subject to blanket  assessments. For those who aren’t aware, a blanket determination is when a business classes all contractors inside IR35 at once without ‘reasonable care’. It’s a risk averse and non compliant decision but one that, according to various reports, continues to be made as reform looms.

The financial services industry is apparently one space in which a number of companies are hesitant to work with contractors because of the reform. However, one contractor who shared their thoughts with us believes this will only be for the short term and “after a period of time” these businesses “will work out how to engage contractors outside IR35”.

CEST barely used in IR35 determinations

Our research also provided insight into HMRC’s ‘Check Employment Status for Tax’ (CEST) tool. Much has been made about the tool’s workings, with experts often raising concerns about the reliability of the government’s technology. Even the House of Lords, following an investigation into IR35, concluded in a report published earlier this year that CEST “falls well short of what is required”.

It’s clear many contractors agree, with one describing it as “not fit for purpose”. Also apparent is that worries about the tool’s effectiveness have meant it has been used sparingly, and by just 4.2% of contractors surveyed.

In the coming months as businesses prepare to administer the IR35 rules, the lack of confidence shown in CEST, along with the due diligence taken by contractors in determining IR35 status, are certainly worth paying close attention to.

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Published on: 26 October 2020 - By: First Freelance