IR35 tax rules will be changed tomorrow and medium to large companies will be required to see the tax status of contractors they hire. This is expected to have a negative impact on the self-employed as costs rise and ahead of the changes, many freelancers are set to abandon the sector altogether.
Recently, the Association of Independent Professionals and the Self-Employed (IPSE) warned tomorrow’s changes are arriving at the “worst possible time” for contractors who are still struggling with coronavirus.
Research from the organisation showed that 50 percent of freelancers are planning to stop contracting in the UK after the changes – unless they can get contracts unaffected by them.
Instead, these freelancers are planning to seek contracts abroad (24 percent), stop working altogether (12 percent), seek an employed role (17 percent) or retire within the next year (11 percent).
Additionally, clients (or businesses) also seem to be reacting “badly” to the changes, with nearly one in four contractors (24 percent) said in February that their clients were either uncertain or had made no indication of what they would do in response to the IR35 changes.
Many of these companies, nearly a quarter according to IPSE, are planning to “blanket-assess” all their contractors as “inside IR35” and 21 percent will only engage contractors working through umbrella companies going forward.
Nearly one in 10 (eight percent) contractors have detailed their clients are planning to cease engaging with contractors altogether.
Andy Chamberlain, the Director of Policy at IPSE, commented on the upcoming changes: “The changes to IR35 would do serious harm to the self-employed sector at the best of times, but now they are adding drastic, unnecessary damage to the financial carnage of the pandemic – undermining the UK’s contractors at the worst possible time.
“The crucial problem with IR35 is still its complexity: in fact, it is so complex that HMRC has lost the majority of tribunals on its own legislation.
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“And there remain serious doubts about the CEST tool HMRC designed to supposedly cut through this complexity – above all that it still does not account for one of the crucial deciders of IR35 status: mutuality of obligation.
“Now the changes to IR35 are shifting this complexity from contractors themselves onto their clients. The result is clear: chaos.
“Many clients are pushing all their contractors inside IR35 – against the rules of the legislation.
“Many more are only engaging contractors through umbrella companies, while others are scrapping their contractor workforces altogether – just when, as the economy opens up, they will need them most.
Self-employment issues were recently highlighted by data from the ONS, which in late March revealed self-employed numbers plummeted over the course of 2020.
Derek Cribb, the CEO, examined the worrying figures: “The latest ONS figures, which show 660,000 people have left self-employment in the last year, demonstrates the devastating impact of the pandemic on the sector. In the year since the first lockdown, the self-employed have suffered a shattering financial loss – especially the 1.5 million who were excluded from government support for much of this time. A large proportion of this group – particularly those working through limited companies – are also still excluded, with devastating financial consequences.
“The pandemic has had a disproportionately damaging impact on the self-employed sector in the last year, with one in eight being driven out – into employment or out of work altogether – and many more struggling with severe financial loss. More than one in five have had to take on credit card debt to get by, while one in seven have gone into their overdrafts and more than a quarter have burned through all their savings. And we have heard many much sadder stories from individual excluded freelancers. These are drastic problems that freelancers will be struggling with for years to come.
“One of the crucial causes is the complexity of self-employment in the UK: the excessive number of ways people can be freelance – from limited companies to PAYE freelancers. This systemic complexity then led to terrible individual consequences as the government struggled – and in many cases failed – to distribute support to the various and very different self-employed groups.
““We continue to call on the Government to look again at excluded groups while there are still damaging restrictions in place. Looking to the future, though, we also urge the Government to give the disproportionately hit self-employed sector the time and space to recover – with economic stimulus and not tax grabs. We therefore also continue to urge the government to delay and rethink the coming changes to IR35 taxation. Instead of such damaging changes, we call on the government to take a longer-term view and initiate a full review of how self-employment and self-employed taxation work in the country – with a view to simplifying this harmfully complex system.”