One of the biggest challenges facing the contracting industry in recent years has been the implementation of the IR35 Off-Payroll Rules (OPR). So what has been the impact on supply chains?

We surveyed nearly 2,000 UK participants across a broad range of sectors, including 1,638 contractors, 216 recruiters and 80 end clients. Our list of 96 questions was designed to produce an accurate snapshot of the current contracting landscape over the past year.

CONTRACTORS’ CHANGING PREFERENCES

One notable trend revealed in our report is the increasing number of contractors who are reluctant to work inside IR35 . Previously, 55% expressed this sentiment, but now it has risen to a significant 72%.

This is backed up by 62% of recruiters reporting that they find it difficult to fill inside IR35 roles, which is further increased to 77% when the Check Employment Status for Tax (CEST) tool is used to make the status determination.

The data also shows that end clients not engaging contractors on an outside-IR35 basis are paying (sometimes drastically) increased costs compared to those who offer outside-IR35 roles. This is mainly due to contractors being forced to work via an umbrella company as a result of inside determinations.

The increased costs suggests a strong motive for offering outside-IR35 contracts, with 77% of recruiters reporting that end-client education and comprehensive IR35 insurance are key to promoting outside-IR35 engagements and protecting the supply chain. Given these findings, we expect to see a drop in umbrella company usage in next year’s survey.

CHALLENGES FACED BY END CLIENTS

A significant portion of end clients (46%) reported that they hesitate to engage with more limited company contractors due to concerns surrounding IR35 legislation. This cautious approach stems from worries about the potential tax and national insurance risks associated with the Off-Payroll reform.

Additionally, negative publicity resulting from an HMRC enquiry also contributes to their apprehension should HMRC be successful.

TRUST IN THE DETERMINATION PROCESS

Approximately 40% of contractors reported that they were not involved in the determination process, and a similar percentage of recruiters stated the same. However, 63% of end clients claimed they do involve contractors and recruiters in the IR35 determination process.

We believe an holistic approach is crucial, with all parties being involved to ensure there is a comprehensive approach to status determinations.

LACK OF TRUST IN THE CEST TOOL

The CEST tool, provided by HMRC, continues to be viewed with scepticism. Half of the contractors surveyed expressed distrust in the tool, and 48% of end clients shared this sentiment. Moreover, 49% of cases determined by CEST were deemed outside IR35, raising concerns about its effectiveness.

POSITIVE SHIFTS AND PROGRESS

Despite the many challenges, there are positive indications of progress. An increasing number of recruiters (51%) reported that end clients are reconsidering their blanket bans on working with PSCs, marking a 30% improvement from the previous year.

Contractors also noted an improvement in the quality of SDS, with 80% reporting that it was clearer and easier to understand.

THE IMPORTANCE OF EDUCATION AND ACCURATE DETERMINATION

To overcome the lingering risk-averse attitude among end clients, investing in education around IR35 is crucial. By understanding the basic principles of employment status and the application of IR35, businesses can confidently engage with limited company contractors and reap the benefits of their skills.

Employing an accurate and reliable IR35 employment status determination process, which may involve independent reviewers, can help ensure compliance and dispel uncertainties.

HOW TO IMPROVE YOUR IR35 PROCESS

Here at Kingsbridge, we can’t overstate the importance of making sure your contractors are covered against IR35 risk. Since April 2021, in excess of 160,000 IR35 assessments have been concluded through the Kingsbridge IR35 Status Tool, averaging around 6,500 per month.

As well as contractors, our knowledgeable team provide IR35 consultancy services to more than 4,500 end clients and 400 recruitment businesses across the UK.

KingsBridge Insurance are proud insurance partner for the Recruitment FDs network.