The government and HMRC have published a joint report into the introduction of IR35 reform in the private and voluntary sectors.
Focussing on the impact of the off-payroll working rules, the report covers the period from October 2019 to March 2022, assessing the 18 months prior to implementation in April 2021, the introductory year, and the following tax year.
Prior to the roll-out of these changes, contractors were responsible for determining their IR35 status. However, to combat what the government perceived as “widespread non-compliance”, the rules were reformed – and the responsibility for determining IR35 status shifted from the contractor to the end-client.
Below, we summarise the key findings from the government’s latest report.
The report estimates that around 250,000 workers are now working on the payroll of other organisations, as opposed to their own limited companies. However, the study claims that only 130,000 of those have made the move as a direct result of the reform.
It also makes the bold claim that “more PSC workers have been unaffected by the reform than affected”.
According to the report, 130,000 workers represent 2.5% of the self-employed workforce and less than 1% of the total workforce.
Of the 250,000 working on the payroll, HMRC estimates that 65% are working directly for businesses as employees.
The report also estimates that around 20% of workers now operate through an umbrella company and 15% work through agencies (though it accounts for some churn, suggesting around a quarter of those operating through umbrella companies have since changed their way of working, and around a third of those working through agencies have done the same).
The remaining 3%* have continued to work through their own limited companies having been deemed employed for tax purposes – that is, inside IR35.
*Numbers do not total 100% due to HMRC rounding figures up
According to the report, IR35 reform has generated an additional £1.8bn in tax revenue over the period in question.
This increase is attributed to increased tax receipts from PAYE Income Tax and National Insurance, and reductions across Corporation Tax, Self-Assessment Income Tax, VAT, and tax on dividend payments.
Although, as experts have pointed out, the amount of revenue raised by contractors being wrongly placed inside IR35 or forced to operate on payroll is not explored.
HMRC estimates that, overall, businesses have incurred one-off costs of between £90m and £230m in preparing for IR35 reform, as well as somewhere between £150m and £370m on operating the rules in the first year.
The report also suggests that these operational costs will “reduce over time”.
Surprisingly, the report cites external research which found “around half of clients found the reform easy to implement, although around a quarter found it challenging”.
The report also says that the educational and support materials provided by HMRC to assist with implementation were found useful by “nearly all” who used them. This is despite the widespread concerns which continue to plague HMRC’s IR35 tool, CEST.
Out of a total of 250,000 workers that HMRC believes have moved from operating through limited companies to working on the payroll, the report estimates that just 500 workers have joined tax avoidance schemes.
However, with around 50,000 workers moving onto umbrella company payrolls during the period in question – and the umbrella industry remaining unregulated – this is likely to be a low estimate.
While the report claims that “understanding the impacts of the reforms continues to be a priority for the government”, it instead seems to dismiss them.
Speaking to The Register, Seb Maley, Qdos Contractor CEO, said that the findings painted a picture of “plain sailing”, but he dismissed the report as “another government study to add to the growing pile of those which fail to reflect the reality of the situation.”
"We're being told that half of businesses have found it easy to comply with the off-payroll rules and that around eight in 10 firms assess IR35 status on a case-by-case basis.
“These statistics paint a nice picture, but I would take them with a pinch of salt. True, more businesses are getting to grips with these rules, but it's been a difficult journey”.
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