IR35 news: IT contractor pay soars in wake of IR35 reforms

A total of 96% of medium-to-large IT businesses in the UK have increased the amount they pay to private contractors

IR35 at a glance

IR35 is a piece of legislation designed to tackle tax avoidance from 'disguised employment' where self-employed contractors set up limited companies to pay themselves through dividends, which are not subject to National Insurance.

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It was first introduced in 1999 by then-chancellor Gordon Brown. However, as part of the November 2016 Autumn Statement, current chancellor Phillip Hammond said that public bodies using contractors would be responsible for IR35 enforcement from 6 April 2017.

It's thought that contractors could lose up to 25% of their money with IR35, according to ContractorCalculator, and as a result, almost 85% said they would consider leaving the public sector to work for private companies instead, according to a recent Qdos Contractor's survey.

The IR35 definitions are a little fuzzy, but if you work onsite with your client who also manages you and supplies your equipment, or if you lead a team of employees that work for the client, IR35 will most likely hit you.

This is particularly worrying for government and public bodies, as they rely heavily on IT contractors, and many of those resources would be put at risk with the IR35 rules.

Head to our What is IR35? page for a detailed breakdown of the legislation.

Latest news: Contractor pay soars since IR35 applied to private sector

Technology companies that rely on contractors for business growth have been forced to increase their pay rates since the introduction of IR35 in the private sector in April 2021.

A total of 96% of medium-to-large IT businesses in the UK have increased the amount they pay to private contractors who are deemed essential to modern and future work practices, according to a report from Brookson Legal.

The average contractor pay rates in IT businesses have far exceeded the average annual increase for payroll workers with 70% of companies raising their freelancer rates by 11% or more since IR35 was introduced to the private sector.

More than half of IR35 decision-makers (61%) said they were forced to increase their rates between 11-19% while some (14%) increased their rates by more than 20%.

The vast majority of IR35 decision-makers in IT businesses (75%) reported struggling to access a flexible workforce so it’s important that contractors are offered an attractive package if businesses want to retain their talent. 

Data from 2019 showed the majority (59%) of contractors would actively search for jobs that sat outside of IR35 tax rules and the report also showed its important for employers to clearly advertise roles that sit outside IR35, or have a robust IR35 strategy in place.

Analysis of job market data showed just 1.27% of contractor roles are clearly advertised as sitting outside of IR35, contrasting the government’s predictions that two-thirds would ultimately sit outside of the off-payroll tax rules.

Dates taken from the government’s ‘check employment status for tax’ (CEST) tool showed that around half of jobs (49-56%) determined so far fall outside of IR35.

It indicates that employers need to be more explicit in their hiring adverts of what tax rules their contractors will face, as well as offering an attractive total package to entice the top talent on the market.

Findings also showed just how important contractors are to modern IT businesses with the prediction shared by nearly all of those surveyed that businesses will continue to rely on contractors for key business growth areas for the following 18 months.  

A total of 98% of IT businesses will continue to lean on contractors and freelancers as a result of hiring challenges and skills shortages.

“With job vacancies reaching an all-time high, presenting an attractive, compliant and competitive IR35 offer to talent is the best way to regain some control in an uncertain environment,” said Matt Fryer, head of legal services at Brookson Legal. “It is also crucial to unlocking the benefits of a truly flexible workforce in the longer term.

“A robust and evolving IR35 solution will not only help companies recover and grow in the wake of the pandemic, it will ensure they are more agile and able to scale their workforce up and down to meet project needs.”

A robust IR35 strategy is needed to attract the top talent, but also to escape the heavy fines that violations can incur. 

Her Majesty’s Revenue and Customs HMRC has issued multi-million-pound fines to public sector organisations that have failed to adequately determine the tax status of their freelancers. 

The Department for Work and Pensions, for example, was slapped with an £87.9 million fine in July and the Home Office was also hit with a list of fines totalling £33.5m just days later for similar transgressions.

IT businesses are largely confident their strategy is compliant as 98% say their strategy aligns with the rules. 

HMRC afforded the private sector a one-year grace period in April 2021, giving it time to adjust to the new rules and ensure compliance by April 2022.

The majority of respondents said they plan to review their IR35 solution before this ‘soft landing’ period ends to make sure all the stop-gap quick fixes that had been implemented in initial efforts are now fully compliant. 

Such initial quick fixes included relying on the contractor themselves to determine their IR35 status and relying on that, and relying on the determination of an agency, despite the IR35 rules clearly laying the burden of determination on the end-employer.

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