• One in 10 contractors (10%) are currently out of work as a direct result of IR35 reforms
• More than half of contractors (53%) have walked away from opportunities that were inside IR35 in the past 12 months
• Three in five contractors (62%) vow to not work inside IR35
• More than a fifth of contractors (22%) plan to shun UK companies bound by off payroll rules in favour of overseas competitors
• Around one in four contractors (24%) have been asked or required to indemnify their clients against the risks of IR35 compliance.

The 2017 and 2021 reforms to IR35 – known as the off payroll working rules – had an immediate and damaging impact on the contractor sector. Now, with the launch of IPSE’s first IR35 Spotlight report, we reveal the long-term effects of the reforms and the trends emerging in UK contracting as a result.

Concerningly, the conditions created by the IR35 reforms are keeping a notable proportion of contractors out of work, with 1 in 10 (10%) reporting that they are not currently working due to IR35.

Despite the chilling effect that IR35 reform has had on the willingness of some clients to work with contractors and the availability of outside IR35 roles, contractors are resolutely defending their status as independent businesses. More than half (53%) reported that they have rejected an offer of work in the past 12 months solely because the engagement was deemed to be inside IR35, and three-fifths (62%) said that they intend to only work on outside IR35 engagements over the next 12 months.

Contractors are not only prioritising outside IR35 roles in the UK; in fact, more than a fifth (22%) plan to seek contracts with overseas companies as a result of IR35, delivering a knowledge and skills boost to competitor economies at the expense of UK PLC.

However, contractors that secure outside IR35 roles are now increasingly contending with the uncertain implications of indemnity clauses in their contracts; just under 1 in 4 (24%) contractors have been asked – or required – to agree to an indemnity clause by their client as a condition of securing an outside IR35 role.

Clauses that indemnify a client or agency from their IR35 liabilities in the event of HMRC enforcement have not been tested in a UK court, meaning it is unclear whether they are enforceable. Nonetheless, the growing prevalence of these clauses in contractor engagements is a concerning sign that HMRC’s damaging reforms have reallocated IR35 liabilities in name only.

Introduction

Since the introduction of the 2017 and 2021 off payroll working reforms to IR35 in the public and private sectors respectively, IPSE research has revealed the significant impact of the reforms on contractors and clients alike.

Successive surveys of freelancers and clients showed that over a third of contractors (35%) had left self-employment since the changes to IR35,1 whilst over a quarter of clients (28%) had decreased the number of contracts they’ve given to contractors since the introduction of the 2021 reforms.2

Similarly, the research also exposed huge issues in how clients approached the IR35 determination process; six months on from the reforms, one in five contractors (21%) we surveyed reported being subject to a blanket inside IR35 determination; a further 11 per cent were moved onto a payroll without an assessment by their client; and two in five (38%) reported that their client hadn’t provided a Status Determination Statement.

IPSE’s research also found a sharp increase in the number of contractors being forced to operate through an umbrella company as a result of the IR35 reforms. In fact, more than two thirds of respondents (69%) reported that the introduction of the reforms was the sole reason for now working via an umbrella company, with 70 per cent of these reporting that they have lost independence at work as a result.

IPSE’s annual IR35 Spotlight will track key metrics related to IR35, including the ways contractors work, their client’s approach to the rules and the success rate of appeals against client determinations. The aim is to be able to report IR35’s long-term impact on UK contracting.

In order to track the engagements of contractors and the behaviour of clients when navigating the IR35 rules, we asked respondents a series of questions such as how the client determined the IR35 status of the engagement, whether a Status Determination Statement (SDS) had been provided, and how the contractor chooses to operate.

When asked about their current working status, 82 per cent of contractors reported that they are currently working, whilst just 18 per cent of respondents were not. Interestingly, this exactly matches our findings from 2021 when we asked the same question (82% currently working and 18% not currently working).

When looking at the breakdown by age, 92 per cent of respondents aged between 16 and 49 years old indicated that they are currently working compared to 79 per cent of those aged 50 years old and above.

With the Chancellor’s Spring Budget in 2023 largely focusing on getting workers back into work and a great deal of focus placed on the economically inactive,6 we asked respondents why they were not currently working.

Notably, almost three-fifths of those not currently working (57%) reported that this was due to the impact of IR35 reforms in the private sector.

A further 37 per cent indicated that they are currently in-between roles and have been in work over the last 12 months, whilst 30 per cent cited government policy towards the self-employed.

In addition, 22 per cent of those not currently working reported that they are not incentivised to return to the labour market.

Interestingly, 16 per cent reported that they are currently retired but would be open to returning to the labour market, whilst another 12 per cent were retired and had no plans to return.

On average, contractors have worked on two engagements over the last 12 months.

The overwhelming majority of engagements (82%) were with private sector clients, whereas 18 per cent of engagements were with clients based in the public sector.

Looking at the IR35 status of engagements over the last 12 months reveals that 20 per cent of all engagements in the private sector were determined as inside IR35, with 80 per cent determined as outside IR35.

A similar picture emerges when looking at the IR35 status of engagements in the public sector; over the last 12 months, 25 per cent of engagements were determined as inside IR35 whilst 75 per cent were determined as outside IR35.

Interestingly, contractors reported that 28 per cent of engagements were with a client that is legally defined as a small business and therefore exempt from the requirement to assess the IR35 status of an engagement.

A further 18 per cent of all engagements were with clients based wholly overseas and therefore also exempt from this requirement.

Notably, 53 per cent of contractors indicated that they have rejected an offer of work in the last 12 months solely because the client deemed the engagement to be inside IR35.

A further 45 per cent reported that they had not rejected an offer work solely due to the engagement being deemed inside IR35.

In order to track the engagements of contractors, we asked respondents how they operate in their current engagement - or if operating on multiple roles, how they operate on the engagement that takes up most of their time.

Almost three-fifths of contractors (62%) reported that they are currently being paid gross through their own limited company for their current engagement. Interestingly, this closely aligns with our findings from 2021, where 57 per cent of contractors also reported that they were currently working through their own limited company.

Notably, three in ten (30%) reported that they are operating through an umbrella company, which represents a slight fall compared to our research from 2021 (34% operating through an umbrella company in 2021).

In addition, seven per cent of contractors indicated that they are on an agency payroll, which closely aligns with our findings from 2021 (8% operating through an agency payroll in 2021).

Just two per cent indicated that they are on a client’s payroll.

'Current engagements for those contracting'

Percentages do not add up to 100% because respondents were able to select multiple responses.

A Status Determination Statement (SDS) must be provided to the contractor for every contract that is agreed, based on the outcome of an IR35 assessment. From the 6 April 2021, medium and large-sized businesses have been legally required to carry out the IR35 status determination and provide an SDS to all contractors.

Despite these being legal requirements for medium and large-sized businesses, three-fifths of contractors (60%) reported that their client had not provided them with a SDS. This represents a significant increase on our findings from 2021 where just 38 per cent of contractors had not been provided with a SDS.

This is especially concerning given that just 12 per cent of respondents to this question were subject to the small business or wholly overseas exemption.

Just 34 per cent of contractors indicated that they had received a SDS for their current engagement.

For the contractors who were provided with an SDS, as legally required, 82 per cent of these agreed with the IR35 status determination. This represents an increase on our findings from 2021, where just 69 per cent of contractors agreed with their IR35 status determination in the aftermath of the reforms being introduced.12 This can largely be attributed to clients relaxing their blanket approaches to IR35 status assessments and to contractors operating through a limited company in general.

Similarly, 14 per cent of respondents now report that they disagreed with their client's IR35 status determination, which is a decrease on our findings from 2021 where 29 per cent disagreed.13

Of those who disagreed with their client's IR35 status determination, over half (52%) challenged it, whilst 48 per cent did not challenge it, despite disagreeing with the assessment.

Regrettably, the overwhelming majority (96%) of those who challenged their status determination reported that there had been no change as a result of the challenge, whilst four per cent indicated that their IR35 determination was successfully changed.

In comparison, our research from 2021 revealed that 17 per cent had successfully changed their IR35 determination following appeal.

In order to understand the long-term impact of IR35 on the contracting sector, we asked contractors about the IR35 status of their current engagement or if operating on multiple roles, the IR35 status of the engagement that takes up most of their time. Looking at the IR35 status of the engagements reveals that 45 per cent were deemed as outside IR35 whilst 28 per cent were deemed as inside IR35.

A further seven per cent of respondents who responded to this question were working for an end-client that is a small business and therefore exempt from IR35 legislation whilst another five per cent were working for an end-client that is wholly overseas and also exempt from IR35 legislation.

Concerningly, six per cent of contractors indicated that the end-client had not discussed IR35 with them.

Interestingly, contractors were slightly less likely to be operating on outside IR35 contracts since our research from 2021 (49% compared to 51% in 2021) and also less likely to be operating on inside IR35 contracts compared to our previous research (30% compared to 36% in 2021).

Instead, contractors are now slightly more likely to be working for an end-client exempt from IR35 as they are a small company or based overseas (14% compared to 10% in 2021).

Similarly, contractors were also more likely to report that their client had not discussed IR35 with them compared to our findings from 2021 (6% compared to 3% in 2021).

Overall, the research now indicates that whilst clients have perhaps eased their initial blanket approach to assessments and blanket bans to those working through a limited company in the aftermath of the rule changes in 2021, contractors are now more likely to be actively searching for clients exempt from the IR35 rules.

In order to understand the impact of IR35 on the actions of clients, we asked contractors how their client for their current engagement had determined their IR35 status.

Almost two-fifths of contractors (37%) indicated that their client used the CEST (Check Employment Status for Tax) tool to determine the IR35 status of their current engagement. This represents a notable increase on our research from 2021, where 18 per cent of engagements were determined in this way.

Interestingly, 34 per cent reported that their client had used a third-party company to assess their IR35 status which is a significant increase on our findings from 2021, where just over a fifth (21%) reported the IR35 status of their engagement had been determined in this way.

Just over one in ten contractors (12%) reported that their client used a tool or piece of software other than the CEST tool to determine the IR35 status of their engagement. Interestingly, this represents a significant increase on our findings from 2021, where just six per cent of contractors reported this.

Concerningly, a further 11 per cent of respondents understand that their client has determined all engagements to be inside IR35 – a blanket assessment. However, the percentage of contractors who reported being subject to a blanket assessment has fallen since 2021, where 21 per cent of contractors said this was the case.

A further nine per cent of contractors reported that their client made the IR35 assessment themselves without using any tools or software, whilst six per cent indicated that their contract was advertised as being inside IR35.

Just two per cent of respondents indicated that their client insisted they work on payroll without assessing the IR35 status of the engagement – a blanket ban. This represents a sharp decrease from our research in 2021, where 11 per cent of contractors reported that their client had implemented a blanket ban.

'How did your client determine your IR35 status?'

Percentages do not add up to 100% because respondents were able to select multiple responses.

We also asked those currently operating through an umbrella company (30%) about their overall level of satisfaction in order to measure the impact of increasing umbrella company use by contractors since the imposition of IR35 reforms in the private sector.

Closely aligning with our research findings from 2022, seven in ten contractors that are operating through an umbrella company (70%) now report that they are either somewhat or very dissatisfied about working through an umbrella company. For comparison, 74 per cent of umbrella company workers were either somewhat or very dissatisfied about working through an umbrella company in 2022.

Just 12 per cent of those operating through an umbrella company indicated that they were either somewhat or very satisfied about working through an umbrella company.

A further 18 per cent were neutral about the fact that they operate through an umbrella company.

In order to understand the impact of the IR35 reforms in the private sector on the way that contractors now operate, we asked respondents whether they have closed their limited company due to the implementation of the reforms.

Notably, 36 per cent contractors reported that they have closed their limited company due to the introduction of IR35 reforms in the private sector. Indeed, we know from previous findings in this report that many of these contractors have not returned to the labour market since closing their companies.

Just over half of all respondents (56%) reported that they have not closed their limited company due to the IR35 reforms in the private sector.

A further five per cent indicated that they have never operated though a limited company.

An indemnity clause is where contractors are asked or required to accept a contractual condition that they will indemnify fee-payers against HMRC tax investigations. Despite not knowing if these clauses are legally enforceable, IPSE is aware that clients are increasingly using such clauses for outside IR35 engagements to cover against any retrospective HMRC investigation relating to IR35.

To better understand the prevalence of indemnity clauses in contracting, we asked contractors whether a client of theirs has ever asked or required them to agree to an indemnity clause as a contractual condition for an outside IR35 engagement.

Concerningly, just under a quarter of contractors (24%) reported that they have been asked or were required to agree to an indemnity clause.

On the other hand, 67 per cent of contractors had not been asked or required to accept such a clause, whilst nine per cent were unsure.

Of those that had been asked or required to accept an indemnity clause (24%), 63 per cent simply accepted the indemnity clause and signed the contract.

Conversely, 18 per cent indicated that they successfully negotiated the indemnity clause out of their contract.

In order to understand the long-term impact of the IR35 reforms in the private sector, we asked contractors how they intend to operate over the next 12 months.

Over three-fifths of contractors (62%) reported that they intend to continue to work as a contractor only if they can find contracts that are deemed to be outside IR35.

Interestingly, 29 per cent indicated that they intend to only work as a contractor for small clients who are exempt from making IR35 determinations, whilst 22 per cent of contractors intend to work as a contractor regardless of their IR35 status.

Notably, just over a fifth of contractors (22%) intend to seek contracts abroad – reducing the pool of flexible talent available to UK businesses and compounding ongoing labour shortages.

Just 12 per cent of contractors intend to work via umbrella companies, whilst seven per cent intend to work as an employee and another seven per cent intend to retire.

Percentages do not add up to 100% because respondents were able to select multiple responses.

The research builds on IPSE's previous reports from 2021 and 2022 and reveals that the IR35 reforms are continuing to deeply damage the prospects of clients looking to engage freelance expertise and talent but also forcing many contractors into economic inactivity or to seek contracts abroad – at a significant cost to the UK economy.

It’s clear that the government must urgently review the impact of the off payroll working reforms in both the private and public sectors. The government must also not be hesitant to make radical changes to the legislation, including scrapping it altogether, if the review exposes the damage to labour market shortages and the economy as this report has found.

With the report also highlighting grave concerns amongst the UK’s contracting sector over the use of indemnity clauses by clients and being forced to operate through an umbrella company, the government review should also make sure to cover these areas and be prepared to clampdown on these actions from clients.

In conclusion, urgent action is required to address the persistent harm caused by the IR35 reforms. The government's review should encompass the entire supply chain, reviewing the actions of clients, agencies and umbrellas alike - including the neglect of SDS issuance - and be accompanied by robust measures to revive the UK's contracting sector.