IR35: What are business owners and freelancers thinking?

Contractors working in the private sector are set to face a massive change in their taxation status and how they work with their clients following the introduction of IR35 changes in 2020. Xenios Thrasyvoulou, Founder and CEO of TalentDesk.io, explains how businesses will need to prepare for the landmark shift.

April and the implementation of IR35 are just three months away, and it has undoubtedly been a subject of confusion from the get-go. Applicable only for mid-large sized businesses working with contractors, who work through PSCs, TalentDesk.io has been investigating what business owners and freelancers understand about the new legislation, and how they plan to deal with the forthcoming changes.

The results of a survey which took in the opinions of over 1,200 business owners and freelancers reveal that the outlook is overarchingly one of confusion. These are the five key takeaways of the research.

Fewer than half of those involved in the research understood the full scope of IR35

48.6% of business owners and 65.16% of freelancers admitted to being uncertain about the full scope of IR35, what it means for them, and the steps that they should be taking to protect themselves against falling foul of the new legislation.

This is concerning on a number of levels. With around nine weeks to go before IR35 comes into play, employers should be ready to determine the employment status of their freelancers and contract workers. If they get it wrong, it has the potential to cost them significant penalties. And it could make thousands of pounds difference to the income of their contingent workforce: contractors not taking the necessary steps to understand their employment classification could find themselves exposed to legal action and a hefty tax bill further down the line should they lack the sufficient evidence to support their declaration of being outside the rules of IR35.

“I might as well go back to full-time employment and get full benefits such as paid holiday, sickness and a pension.”

The level of concern around the negative impact of IR35 on freelancers is succinctly summed up in the above comment from one survey respondent. Sixty-eight percent of freelancers expect a negative impact on their business once the off-payroll rules come into play. Concerns are rife over whether profitable, regular contracts will expose freelance workers to scrutiny over their employment status. This has led more than a quarter (26.71%) to fear a loss of income.

And optimism isn’t much more abundant amongst business owners, with 65.6% fearing that IR35 will affect them negatively. Loss of income and loss of potential for competitive advantage are both predicted impacts of the legislation change.

There is no confidence in CEST

CEST, the Check Employment Status Tool, was released by HMRC in 2017. From day one, it became the object of criticism and frustration. Important factors like Mutuality of Obligation were not included in the system’s calculations, leading to thousands of misclassifications.

Almost three years down the line, more than 85% of business owners involved in the survey said that they either feel like they cannot rely on the results of CEST, or were unaware about the tool in the first place.

The good news is that CEST was updated at the beginning of this year, potentially saving millions of business owners from the expense of seeking independent legal and compliance advice. The question is whether this revised CEST platform has become available early enough to be of use to businesses ahead of the IR35 deadline.

Blogs and other sources are more trusted than official Government websites for IR35 information

As you might expect, the majority (58%) of business owners seeking advice on IR35 have turned to accountants and legal advisors – a sensible course of action. What was surprising is the fact that almost half (50.9%) are getting their information from blogs, forums and other sources – more than the number of people using official Government websites (37.6%). 

Only one in five businesses have paid for professional advice on how legislation will impact their business - and it can be costly

All legislation changes come with controversy. Anything that necessitates policy and/or procedure change will always be unwelcome – especially when it carries an associated expense. Just 20% of businesses have paid for practical advice, and 5% of those businesses have spent over £5000.

In the long-term, many of these changes prove to be insightful and beneficial. The worrying part of the current IR35 scenario is the lack of preparedness amongst those most likely to be affected by the legislation. Perhaps the most important takeaway from this research then, is that time is ticking. But there is still time to take control of IR35, before it takes control of you.

Disclaimer: This article is based on a survey sent out to over 1,200 business owners and freelancers and is for educational purposes only. The information contained within it does not constitute legal advice and any use of it is at your sole discretion. You are advised to obtain independent expert advice from a lawyer.