How Have the IR35 Reforms Impacted Contracting?

The IR35 ‘off payroll’ working regulations have been active since 2000 but were reformed in April 2017 to put the responsibility on the client and only applied to those working in the public sector. As of April 2021, the IR35 reform was extended to the private sector, so how is the reform impacting contracting and the contingent worker market?

What is IR35?

The IR35 reform was introduced to define rules around how an independent contractor should be taxed. Its original aim was to ensure individuals were paying the right amount of income tax and only covered the public sector.

Changes to the reform in April 2021 saw the legislation extend to those working in the private sector. A key change is that middle to large-sized private sector companies now determine a contractor’s IR35 status, rather than the individual. However, contractors working for small companies will continue to determine their IR35 status themselves.

An independent contractor that falls within IR35 will typically pay taxes and National Insurance contributions that are deducted through their payroll but they maintain contractor status rather than being an employee.

3 key criteria to determine IR35 status

There are three outline criteria that can help decide whether a contractor falls inside IR35, they are:

1. Supervision, Direction and Control: What degree of supervision, direction and control does your end-client have over what, how, when and where you complete your contract and day to day work?
   
   
2. Substitution: Are you required to carry out the work yourself, or can you send someone in your place?
   
   
3. Mutuality of obligation: Is your client obliged to offer you work, and are you obliged to accept it?

Beyond these three key principles, contractor workers should also consider how they are paid, their corporate involvement and employee type benefits they receive to help determine their IR35 status.

How the pandemic changed IT contracting

Originally planned for rollout in April 2020, the reforms were due to come in shortly after the start of the pandemic. Due to the already uncertain market, the reforms were delayed by 12 months to give companies and contractors more time to prepare.

By far the biggest change to the workplace during the pandemic was the shift to remote working, but the uncertainty the pandemic brought also meant that businesses needed to scale their workforces up and down to meet the demands of the turbulent market and economy and one way to ensure flexibility is to use contractors.

While in the early stages of the pandemic many businesses reduced their contractor use, they soon recognised the benefit of replacing full-time employees with contractors as a way to reduce their costs and also improve their scalability for 2020.

The pandemic certainly accelerated digital transformation across every industry and for businesses of all shapes and sizes. As restrictions began to lift in 2021 and tech projects that had been on hold resumed, the demand for IT contractors soared and we believe it will continue to do so in 2022 and beyond.

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