IR35 is a barrier to growth that Britain and Rachel Reeves can’t afford

For some time now, a consensus has been forming around the need to fix IR35, writes Josh Toovey, senior research and policy officer at IPSE.

APSCo, CBI and Onward are all lining up against IR35 reform

The CBI made the point of including the need for a fix in their submission for Autumn’s 2024 October Budget. 

Britain’s biggest business lobby group highlighted the “significant administrative burden” that the rules of April 6th 2017 and April 6th 2021, are placing on hirers.

The influential centre-right think tank, Onward, has cited IR35 as the greatest barrier to entrepreneurship in Britain today, calling for the off-payroll working reforms to be scrapped and the responsibility for determining IR35 status given back to contractors. Under the 2017 and 2021 frameworks, all PSCs but those with ‘small company’ clients in the private sector no longer have a say on their own status.

APSCo, a major trade association for recruiters, has previously written for ContractorUK on the significant financial liability faced by recruitment companies, as a result of the reforms to the IR35 legislation of 2000.

Off-payroll working rules: the real impact on contractors

Last but certainly not least is the impact the off-payroll working rules are having on contractors themselves.

• One in ten contractors is out of work due to IR35
• 25% plan to seek roles abroad because of the rules
• More than 50% turn down roles deemed ‘inside IR35.’

This is what the sector told us in our landmark annual report on IR35 from last year. If you missed that report, there are details on how you can contribute to our 2025 report on IR35, below.

Standing back from what policymakers probably see as the minutia, if economic growth is the be-all and end-all – as the current chancellor Rachel Reeves readily reminds us, why does it feel like the entire supply chain – businesses, agencies and contractors alike – continue to be ignored when it comes to IR35?

Confusion is rife

Distinguishing between self-employed and employed is notoriously challenging.

Unfortunately, shifting the responsibility to clients (as both sets of reforms did) only exacerbated this problem. How can clients possibly know if a contractor is in business on their own account without potentially breaching commercial confidentiality and privacy?

Clients, unsurprisingly, took a risk-averse approach and implemented blanket bans and blanket assessments – which in itself is an act of non-compliance with the HMRC-enforced OPW rules.

While the introduction of the offset mechanism last year (in April) has provided some clients with the assurances to once again engage on an outside IR35 basis, many clients continue to be wary of the potential liability of getting their IR35 determination wrong.

HMRC is still steadfast

As it stands, ministers are reluctant to act on IR35 owing to the “additional £1.8 billion in tax revenue” generated by the reform in both the private and voluntary sectors. And with HMRC being put under increasing pressure to close the ‘tax gap’ and generate additional revenue to fund government spending, the tax authority’s approach will almost certainly remain steadfast.

However, our research shows that the contractor market continues to be a vital source of expertise and efficiency for businesses.

How much value does UK contracting generate for UK plc?

Contributing over £330 billion to the UK economy in 2024, the sector has actually increased its overall contribution since 2023 by £35 billion (although this is in part due to company directors reporting higher turnover rather than higher profits).

We know that self-employment drove the UK’s economic recovery following the financial crisis in 2008, growing by 53% in that period up until 2019. If we are to achieve a sustained period of economic growth, as the chancellor has vowed, the barrier that is IR35 is an obvious starting point.

Your chance to share your experience of IR35

It’s evidently clear that the IR35 off-payroll working rules have reshaped the contracting landscape.

According to our latest Freelancer Confidence Index (Q3 2024), 83% of contractors cited government tax policy relating to freelance working as a detrimental factor impacting their business performance.

Similarly, more than three-quarters of freelance professionals cited government regulation related to hiring contract workers as a factor that lowers their business performance.

It’s vital that even more up-to-date experiences of contractors navigating IR35 are captured and highlighted to the government. In the two years since we started running the survey, our data has had a real impact, securing headlines in both the Financial Times and the Telegraph, as part of our efforts to hold policymakers to account.

Our campaign for an IR35 fix goes on.

Finally, a triple whammy?

We right now need your input on approximately ten questions on IR35 and off-payroll working. Whether the reforms to the Intermediaries legislation have affected your work, your income or your business decisions -- and maybe all three as we fear -- your voice matters. You can take the survey here.