Contractors leaving UK as IR35 Looms – leaving a £2.2BN Productivity Gap in their Wake

New research from offpayroll.org.uk and Inni Accounts reveals that the UK faces a huge productivity crisis as self-employed freelancers, contractors and consultants spanning 19 economic sectors are looking to work abroad in response to blanket bans on Personal Service Companies used by the self-employed to run their businesses (PSCs) and what they regard as unfair IR35 assessments.

The research reveals:

  • 47% of contractors are witnessing offshoring of roles at unprecedented scale
  • 19% of contractors say boards are discovering blanket assessments are hampering strategy, with 49% of regulatory projects unlikely to meet deadlines
  • 91% of contractors think HMRC will break promises on retrospective tax bills
  • 31% of contractors are experiencing anxiety including suicidal thoughts, and 15% say their home is at risk

The news comes eight weeks ahead of the reform coming into force on April 6, and will be a bitter blow to HMRC, which hoped to raise billions on the back of the change. Some 75% of contractors have already left their client or are about to as the scale of unfair assessments comes to light. The unprecedented turnover of self-employed contractors is due to the high levels of mistrust contractors have in HMRC – 91% don’t trust HMRC’s policy and believe they will start retrospective tax investigations. Contractors would rather leave than move from outside to inside IR35 with the same client.

This mood is exacerbated by the finding that in 45% of cases where contractors have been assessed by clients inside IR35, or had their PSCs banned, the legal advice they took before the assessment showed they were genuinely self-employed and operating outside IR35.

According to the research by offpayroll.org.uk, a site where contractors can anonymously name and shame companies making unfair assessments, 23% of contractors have seen a complete PSC ban come in, with a further 1 in 5 being deemed inside. Over a quarter of people were still waiting to hear as of the weekend.

The impact is expected to be greater than foreseen

85% of programme and project managers state that clients do not have sufficient mitigations in place to cope with contractors leaving, and over half (52%) say the scale of the exodus is far greater than their clients expected. Projects are predicted to fail to meet regulatory deadlines leading to fines, incur hefty penalties for late delivery, and are putting revenue and reputation at risk. Only a sixth say that the board is starting to pay attention to the ramifications.

James Poyser, CEO of inniAccounts, and founder of offpayroll.org.uk, explains the impact:

“HMRC estimates that IR35 reform will generate an income of £1.2bn for 2020/21. But it’s clear from the scale of departures that the cost of blanket bans and unfair assessments far outweighs the business case HMRC argues. The OBR flagged off-payroll tax uplift uncertainty as “very high” and we believe the macro-economic impact of the behaviour we are witnessing has not been accounted for. The legislation is fundamentally flawed and rolling it out will have grave implications for UK PLC and the lives of hard-working skilled people.”

“Taking the stance that contractors will stay on your terms because there is no alternative is short-sighted,” argues James. “The majority of contractors are engaged in project delivery so they are well aware of the impact their decision to leave will have on the business and they are not afraid to vote with their feet and let it happen. Nor are they afraid to emigrate abroad and take their skills to countries where they are wanted.”

“Ultimately, they don’t want to be forced into a position whereby they are denied their right to be self-employed, and instead be pushed into false employment with no benefits or rights because the company is running scared of HMRC. What’s more, in the grand scheme of things, they will pay far less in tax than they are today. Investors, regulators, HMRC and stakeholders will be facing utter jeopardy if this reform is not halted and thought through properly. We’ll be submitting this evidence to the Lords’ Select Committee so they can see the full extent of the crisis.”

James concludes

“Last week HMRC announced it was giving companies more time to prepare for IR35 reform and renewed its guidance on ‘reasonable care’. This suggests they know IR35 is creating chaos. But to my mind the intervention is far too late and will do nothing to stop the runaway train. The sooner they revoke IR35 and run a full review on how it is implemented the better. I can’t see how we will compete on an international stage post Brexit otherwise.”

Details of the impact to British business

Research reveals that the impact of banning PSCs and unfair assessments is likely to cause widespread employment, economic and regulatory ramifications, with 47% of contractors witnessing offshoring at scale. 10% say their client is moving hundreds of roles and 4% say thousands away from Britain as companies scramble to keep projects alive. 49% of regulatory projects are thought to be at risk, 33% of projects will be delivered late incurring penalties. 40% of contractors say their client is facing diminished competitive advantage as a result of IR35 decisions. Banking, retail and defence are among the worst hit.

According to 19% of contractors questioned, boards think the decision by HR and supply chain teams to ban PSCs is at odds with strategy with many stating a real disconnect in the business. 44% of contractors don’t think the impact has been realised yet.

The findings from a survey conducted 7-10th February, with 1,485 contractors, are a damning indictment of the debacle that is the IR35 reform and provides critical evidence to the Lords’ Select Committee hearing launched last week. The study found almost six in every 10 projects will fail to be delivered in time. Other consequences include delays to new launches (44%), and digital transformation projects (50%) and customer projects (63%) being put at risk.

Fear of retrospective tax investigations by HMRC

Despite HMRC’s reassurances to the contrary, 91% don’t trust HMRC and think they will start retrospective tax investigations. 69% think the scale of an investigation could be similar to the loan charge. If the worst happens and HMRC launches investigations, then 45% say they have no idea how they would manage it financially – 25% would declare themselves bankrupt, 12% would sell the house or use savings. 43% have taken or are about to take out insurance in anticipation and hope it will save them.
Only 6% of contractors think the assessment process at their client was fair and transparent, and only 13% have been given as Status Determination Statement (SDS). Following HMRCs new advice issued on Friday this would put the majority of businesses at risk of investigation.

The survey found that 30% of contractors have gone through assessments inhouse, 24% via a third party, and for 47% of contractors the process is so unclear they don’t know if it was done in house or not. 23% have been told they can’t challenge their SDS and a further 32% haven’t been told anything about appeals.

“One thing we’ve learnt over the last month is that the approach to the determination is more important than the outcome. Contractors and consultants want to be treated fairly, and objectively – and transparent, collaborative processes will help brands differentiate and attract the best talent.” continues James.

IR35 is taking its toll on people’s lives financially and mentally

The majority of those with banned PSCs or pushed inside IR35 will be taking a pay cut, with most (63%) estimating it will be between 21%-40%. 15% say they will default on mortgages or are already preparing to sell their house as a consequence. This could prove to a particularly difficult blow to take for those who have taken independent legal advice to confirm their tax position as being self-employed.

The uncertainty is damaging people’s quality of life with 51% say they are just about coping but are worried about where it will lead. A third say it is now definitely affecting their mental health, with 4% already going to their GP about anxiety and 1% to talk specifically about suicidal thoughts.

inniAccounts, which founded offpayroll.org.uk, will include the findings as part of evidence it will submit to the Lords’ Select Committee. It is also meeting with MPs to discuss the findings.
You can see how companies are performing on fair assessments at offpayroll.org.uk and by following LinkedIn https://www.linkedin.com/company/offpayroll/.

Since launching the campaign detailed insights have been gathered on over 500 end clients, and the social media campaign has been seen over 1.8m times.

%d bloggers like this: