How have IR35 reforms affected contracting?
It’s been almost a year since the UK government’s controversial reforms to IR35 in the public sector and, with rumours of similar upheaval coming to the private sector in the future, we’re beginning to see the effects of the changes.
What were the reforms?
If you’re not a contractor working in the public sector, or if you’re a freelancer and haven’t had to deal with IR35, you may well have missed the finer details of the reforms. If you don’t know what IR35 is, first read our quick guide to bring yourself up to speed.
The reforms themselves mean that IR35 status in the public sector is determined by the client rather than you, the contractor. This is different to previously (and to how it still is in the private sector) where you declare your own self-employed status and whether you fall into IR35 or not.
The issue is that it’s your client who is penalised if they make the wrong choice, meaning that they are more inclined to play it safe and place you within IR35. This means, in turn, that you are taxed at source like an employee but you do not get any of the benefits of other employees, such as paid holiday entitlement, sick leave and so on.
How have these reforms changed things for contractors?
Besides making contracting in the public sector somewhat unfair for most, the new system has also had the effect of putting off contractors from working in their chosen sector.
ContractorUK reported a 38% drop in active IT contractors – one of the groups hit hardest by the reforms. Although other issues have also affected this slump, the IR35 reforms are, according to them, the biggest factor.
Another group with many members rethinking their contractor status has been healthcare professionals. The NHS has historically relied heavily on locums and agency workers to plug staffing gaps. However, reforms left many saying they would consider leaving contracting if placed within IR35.
Social care has been another sector disproportionately hit, as many social workers are locums, operating under their own limited companies. The reforms have seen them take a huge hit to their income without any of the benefits of being a PAYE employee.
A report from Community Care pointed out that while some social workers hadn’t noticed much difference, others had been forced to eat into their savings or use payday loans to get by. This has meant that many have been forced to consider leaving life as a contractor behind by going permanent or leaving their chosen field entirely.