IR35 is draining the pool of self-employed workers

Andy Chamberlain is director of policy at self-employment association IPSE  

Over the past year, there has been a forgotten crisis affecting self-employed workers in the construction sector: IR35.

Introduced in 2000, the aim of IR35 is to prevent businesses from gaining a tax advantage by disguising employment as a business-to-business arrangement. In April 2021, the government implemented controversial reforms that made the hiring organisation responsible for making notoriously complex tax-status decisions. The change has had a significant impact on contractors who work through their own limited company and it has been hugely burdensome for those who hire them too.

The reform has been widely criticised, with a number of organisations, contractors, opposition parties and even a few Conservative MPs calling out the law for being overly confusing and flawed. It has also led to mass uncertainty for self-employed workers. IPSE research has found that more than one-third of freelancers have quit contracting since the changes took effect in April 2021.

Falling numbers

For contractors working in the construction industry, IR35 has contributed to the number of self-employed workers falling by 10 per cent over the past year. The number of solo self-employed workers in the contraction industry has now dropped to an 18-year low.

“The new rules create a tax risk for any company or agency that accepts the self-employed status of a worker”

IR35 has not been the only factor in the decline, of course. The pandemic and Brexit have undoubtedly taken their toll, but the impact of IR35 should not be underestimated. The new rules create a tax risk for any company or agency that accepts the self-employed status of a worker. Eager to avoid this risk, and baffled by the status rules, many clients have taken the view that it is easier and safer to engage workers through payroll companies, which removes their self-employed status at a stroke.

The self-employed provide skills, dynamism and ideas right across the construction industry. They also create new businesses and fuel the long-term growth of the sector. If the issues surrounding IR35 are not solved there are serious risks to the future development and competitiveness of the industry, as more and more self-employed workers may leave contracting altogether.

How can we solve this?

Solving the issue around IR35 is easier said than done. This month, the flaws surrounding IR35 have been set out in separate reports from the House of Lords’ Finance Bill sub-committee and the National Audit Office. But the issues surrounding IR35 will not be solved by these organisations on their own. Put simply, the problems around the changes to off-payroll working were created by the government and HMRC, and only they can solve them.

Despite vigorous campaigning from a handful of organisations, including IPSE, the government has not yet commissioned a review or reversed its stance on IR35. If it doesn’t relent soon then, regardless of what the prime minister or the chancellor say about building back better, or helping the post COVID-19 recovery, the government will have jeopardised the construction industry’s long-term growth by causing further economic uncertainty for a significant chunk of the sector’s self-employed workers.