Serious flaws exposed in HMRC’s research into the impact of IR35 reforms

Prior to the Christmas break, HMRC finally published its long-awaited research into the impact of IR35. Despite the Treasury continuing to play down the impact of the IR35 reforms, their own commissioned research now exposes some serious flaws with the reforms.

Using IPSE research into IR35 from the past two years - and this latest piece of analysis from HMRC - we’ve compiled a table below to highlight the damaging impact of the reforms for both contractors and clients alike.

The Sample

Before we dive into the comparison, it’s worth pointing out that HMRC’s research is based on a telephone survey of 353 medium and large sized clients, and follow-up interviews with 39 of these clients. For comparison, IPSE’s research into the impact of IR35 on clients was based on a sample size of 501 clients, with the fieldwork carried out by YouGov.

Similarly, IPSE’s research split out clients based on the number of employees, whereas HMRC’s research splits out clients into the following two classifications:

Group-level organisations – Clients that are part of a larger owned group and deal with the administration of contractors for all or multiple establishments within this group

Establishment-level organisations – Clients that carry out the administration of contractors for an individual organisation and not part of a group

Below is a comparison of HMRC’s key findings compared to IPSE’s research:

Despite HMRC’s research differing from IPSE's with regard to the navigability of the reforms, the research closely aligns on multiple areas – producing a damning indictment on the effectiveness of the legislation and the impact on businesses and contractors.

Most notably, HMRC’s research highlights the sheer cost of compliance to businesses, with over a quarter of clients paying more than £5,000 in compliance costs per year – and the difficulty in recruiting freelance talent, with over two in five clients reporting it was more difficult to recruit contractors.

Interestingly, HMRC’s research differed significantly from IPSE’s survey of clients over blanket determinations, making just one reference to the implementation of blanket bans on those operating through limited companies as a footnote. Instead, we all know that blanket bans from clients were commonplace, particularly in the financial services and banking sectors from 2020 onwards.

Taken together, this latest piece of research from HMRC and IPSE’s research from the past two years forms a powerful narrative. It is evident from the key areas outlined above that the reforms have plagued contractors and clients alike, but it is also clear that the reforms are having a knock-on impact on the UK's economic performance.

At a time where the UK is crying out for growth, the government would do well to recognise the research findings and realise that IR35 is holding back not only the self-employed sector, but also wider economic growth.