The impact of IR35 reforms: Reduced opportunities, financial challenges and plans to leave UK contracting

HMRC’s research into the impact of IR35 reforms was woefully inadequate – surveying just 34 employment agencies on their intentions prior to the reforms. Government even conceded that they were unable to carry out “all the reporting it had intended with regard to the Off-Payroll rules,” yet, still they still pushed through with the implementation of the reforms on the private sector.

In order to evaluate the true impact of the reforms, IPSE’s latest research report assesses the impact of the changes on status determinations, availability of work, income and plans for the future.

Reduced opportunities

Concerned by the arrival of the reforms, it is no surprise that several clients opted for blanket assessments, deeming all engagements as inside IR35, or implemented blanket bans on hiring contractors due to fear of falling foul of HMRC’s retrospective investigations.

As a result, it has taken its toll on work and contract opportunities for freelancers – especially for those seeking outside IR35 roles.

Our latest research now shows that the most common response from freelancers about the key challenges they have faced since the introduction of the reforms was a reduction in work, with many having trouble finding “suitable outside IR35 contracts.”

In fact, 31 per cent of freelancers reported that, in the last year, they have refused a contract because the client deemed the engagement to be inside IR35 whilst a further 20 per cent had stopped working with a client for the same reason.

Just over half (51%) of freelancers are now working on contracts which have been deemed outside IR35 compared to 90 per cent prior to the reforms.

In addition, 36 per cent of freelancers now state that their current engagements have been deemed inside IR35.

Financial challenges

As a result of reduced outside IR35 opportunities and increased inside IR35 working, freelancers are now reporting a decrease in day rates, revenue and income.

In fact, 38 per cent of freelancers currently working within IR35 report that their day rates have decreased compared to before the changes to IR35 were introduced. This includes over a quarter (27%) who report a significant decrease in their day rates.

Similarly, the majority (80%) reported that their quarterly income had reduced including almost two-thirds (64%) who reported a significant decrease – a devastating reduction.

On average, freelancers had experienced a 30 per cent reduction in quarterly earnings and worryingly, a quarter (25%) had actually seen their earnings decrease by 40 per cent or more.

Plans to leave UK contracting

The reforms have also altered how freelancers intend to work over the next 12 months, with many planning to leave UK contracting at a time when the self-employed should be driving a post-pandemic economic recovery.

In fact, a quarter (24%) plan to work abroad in the coming year, 19 per cent intend to work as an employee, 11 per cent plan to retire and six per cent are planning to stop working altogether in the next 12 months.

Over half (55%) intend to continue contracting only if they can find contracts that are deemed to be outside IR35. This closely aligns with our survey of freelancers’ intentions prior to the reforms where 56 per cent reported this.

Furthermore, 28 per cent are looking to work for small clients who are exempt from having to make IR35 status determinations.

A further 17 per cent intend to continue contracting regardless of their IR35 status whilst one in ten (12%) plan to operate through an umbrella company.

Overall, as a result of the reforms, freelancers are increasingly working within IR35, with clients often implementing blanket assessments or blanket bans on engaging contractors altogether. In turn, those operating within IR35 are reporting reduced income and many are now planning to leave the UK contracting market as a result of the reforms. Ultimately, this government must realise the importance of the self-employed in driving a post-pandemic economic recovery and not force so many out of the market altogether with ill-thought-out reforms.