Since 6 April 2021, medium and large-sized employers in both the voluntary and private sectors in the UK have been responsible for assessing the tax status of every freelancer they recruit.
Before that date, contractors who billed for their services via limited companies carried out their own assessments as to whether they were self-employed or employed for tax purposes under the off payroll working rules, commonly known as IR35.
Research carried out by the advisory firm Qdos in the aftermath of this change found that among the 1,850 contractors it surveyed in late April, 65% of them had been assessed by their hiring organisations as employed for tax purposes (or inside IR35), while 35% had been assessed as self-employed for tax purposes (or outside of IR35).
Qdos established that among those contractors deemed to be inside IR35, 39% were planning to question these assessments, while a further 11% were considering making a challenge.
In addition, despite it being a legal requirement for organisations to do so, just 56% of those freelancers who had been assessed went on to recall receiving a notice from their hiring organisation informing them of the outcome of its determination of their tax status.
Under my umbrella
The same research also revealed that as many as 64% of contractors said that they had been told by their hiring firm that they could work through a body known as an umbrella company. An umbrella company is a firm that employs a worker on behalf of an employment agency. The agency will then provide the services of that person to their clients.
The agency deducts a fee for placing the worker with the client and pays the rest of the money (sometimes known as the assignment rate or the limited company rate) to the umbrella company.
While such arrangements are legitimate, they are currently unregulated, and there are concerns that some umbrella companies may be exploiting both employment and tax regulation.
From a people management perspective, as a recent CIPD article highlighted, a small survey carried out by CG Pro-Active HR of people professionals’ teams suggests there’s still a significant minority of organisations who have yet to undertake any IR35 status assessments.
But what has been the impact on the economy? Before the change, some forecast that many contractors would simply stop work. After the costs of running a business are deducted, the amount taken in tax from contractors who are basic-rate taxpayers would jump from 26% to 32% (with a reduced ability to claim business expenses), so some would decide it was no longer worth their while being a freelancer. Some predicted that contractors would look to increase their fees to take account of a drop in earnings. However, while IR35 has probably had an impact it’s difficult to disentangle if from other factors, such as the pandemic or Brexit.
For instance, as one would expect, at a macro level HMRC data indicates that the number of people on the payroll has been an increased since IR35 came into effect in April 2021. However, while some of that will be due to IR35, some of it will also relate to the gradual opening of the economy after the third wave of coronavirus.
Similarly, while average earnings have also risen since April, again part of the explanation is the impact of the pandemic on the composition of the workforce. Fewer low-waged individuals and people coming off furlough has inflated the overall average wage, rather than IR35.
At a micro level, there have been claims that IR35 is a contributing factor to the shortage of HGV drivers in the UK. However, so too are the pandemic and Brexit, so it’s difficult to disentangle the cumulative impact on the labour supply in this or in other sectors that have a reliance on such contingent labour, such as oil and gas or health.
Implications for HR and public policy
One deduction from the Qdos survey findings is that given that so many contractors don’t remember receiving one, HR needs to focus on communicating to contractors the status determination reviews that they have carried out. Especially given that these determinations are legal requirements. HR needs to check with its contractors whether they have received their status determination, that they understand the reasons for the determination, how and when it was carried out, and where they can find out more, including how to challenge the determination.
Similarly, HR needs to help set up an appeals process for those wishing to question the status determination that has made. It needs to consider, how this process will work and who will sit on the panel that reviews the evidence and then makes the decision. This is important where IR35 determinations are not binary and expert opinion may need to be sought.
As the recent CIPD article recommended, we would encourage people professionals to review the work or service needing to be delivered and ask whether it’s urgent, if an existing employee can be seconded or developed to fulfil the role, or if there’s an opportunity for fixed-term employment.
If the work or service really is out of the scope of employment, then the HR team will need to help the organisation engage with its chosen contractor on a business-to-business basis.
The same article highlighted that engaging with a contractor on a business to-business basis meant line managers being not treating that individual in the same way as an employee. HR needs to make line managers aware of understand the implications of, say, inviting the contractor to a team social, expecting them to arrive by 9am every day, or allowing them to use the staff gym.
Finally, the CIPD suggests that the government drops its opposition to call for umbrella companies to be regulated so that both the rights of freelancers are protected and that the correct amount of tax is paid, rather than giving this responsibility to Single Enforcement Body, an organisation with a wide remit but limited resources.
For more information on IR35, please see IR35 implications for people professionals
Browse our A–Z catalogue of information, guidance and resources covering all aspects of people practice.
Discover our practice guidance and recommendations to tackle bullying and harassment in the workplace.
Explore our collection of resources around legal issues surrounding employees and workers, including Q&As for various types of workers and relevant case law
Understand what employers need to do to manage agency workers within the law
Practical guidance to help you identify and implement good atypical working practices
Understand what employers need to do to manage fixed-term contracts within the law
How does becoming ‘tech savvy’ improve your professional standing and the HR practice in your organisation?
Research shows part-time working could solve HR’s most pressing issues, according to Professor Clare Kelliher and Dr Charlotte Gascoigne at Cranfield School of Management, and Claire McCartney, the CIPD’s Senior Policy Adviser on resourcing and inclusion
Charles Cotton, CIPD's Senior Policy Adviser on performance and reward, analyses how the increased cost of living is affecting employees using this year’s UK Working Lives survey data from the CIPD
Rachel Suff, the CIPD's Senior Policy Adviser on employee relations, analyses the CIPD’s recent submission to the UK Government’s consultation draft Code of Practice on dismissal and re-engagement