One year after new IR35 rule changes were introduced in the private sector, research from the Association of Independent Professionals and the Self-Employed (IPSE) suggests they have harmed UK businesses.

Working with YouGov, IPSE surveyed more than 500 businesses that use contractors.

Half the businesses surveyed said they couldn’t have achieved the same growth and other business outcomes without contractors. Despite this, 28% of firms said they have reduced the number of freelance contracts awarded in the last 12 months.

More than a third (35%) of clients agreed that it’s more difficult to attract freelance talent since the IR35 changes took effect, with 11% strongly agreeing with this.  

Changes made to off-payroll working (IR35) rules in April 2021 made private sector clients responsible for judging a contractor’s employment status. Previously, it was up to contractors to judge this for themselves.

Being deemed ‘inside IR35’ as opposed to ‘outside IR35’ can have serious financial consequences for contractors. In fact, separate IPSE data suggests that around a third of contractors have left self-employment because of the changes.

The latest research shows that IR35 has affected private sector clients too. Almost one in two businesses (47%) said that IR35 compliance has been an administrative burden in the last year.

Derek Cribb, CEO of IPSE, said: “While the media, over the past year, has mainly analysed the significant and damaging impact of the reforms on self-employed workers, today’s research shows that the changes to off-payroll working have also hindered their clients. Businesses have long relied on freelancers to provide additional expertise and support. The changes to IR35 in the private sector in April 2021 have made it harder for them to hire contractors and has therefore made it even more difficult for them to grow during these turbulent economic times.

“If the government wants to help companies recover post-pandemic, then it needs to start by rethinking IR35. Self-employed workers provide a valuable service for businesses and without a governmental review or further reform, companies will find they aren’t able to hire the necessary skills and talent that freelancers provide and that they are recovering at a slower pace compared to international competitors.”

Without the tax benefits that come with being ‘outside IR35’, running a limited company is expensive and complicated.

Many contractors that have been caught out by IR35 rules have closed their limited companies and switched to an umbrella company to manage their income.

Miles Grady, Director of Umbrella.co.uk, said: “At Umbrella, we work with limited company contractors and umbrella contractors. In the last year, we’ve seen strong growth in the umbrella company side of our business – mainly because it’s easier for contractors, but also because it’s easier for their clients.

“Regretfully, it looks like IR35 is here to stay now. Contractors that have been affected by the rule changes should focus on maximising client rates.”

For more information about IR35 and how working with an umbrella company can help you mitigate the impact, speak to a member of the team. Call: 0800 121 6513.