5 reasons why we’ll see a resurgence of outside IR35 contracting in 2022

It’s fair to say that many of us will be glad to see the end of 2021. In addition to the disruption caused by Covid-19 and lockdowns, 2021 was the year that the IR35 reforms (aka off-payroll working legislation) hit the private sector. For contractors and consultants, this meant blanket bans on PSCs, forcing many to consider the future of their contracting career. Since April, 3 in 10 contractors have left self-employment [IPSE], with many moving to permanent roles or choosing retirement.

Though it’s been an undeniably tough year, we’re starting to see positive signs that we’re coming out the other side of IR35, and the new shape of the contracting market is appearing.

Introduction

In an OffPayroll.org.uk LinkedIn poll, 41% of contractors said they were either not impacted by IR35 or were on the up. Here at inniAccounts, in November alone, we’ve had record numbers of new clients who are reopening limited companies. Many are joining us from umbrella companies where they’ve left an inside IR35 contract for one outside.

As we predicted in our State of Off-Payroll report earlier this year, a two-track market of specialist and generalist contractors has emerged.

Outlook for generalists

Many generalist contractors are now working inside IR35 through an umbrella. It may be that their skills and working practices don’t make a strong enough case to be outside IR35, or perhaps the supply chain has little incentive to act due to an abundance of supply. Whatever the root cause, these contractors are at risk of unfair treatment by rogue umbrellas (more on this later), which is why legislation and regulation is much needed.

Just last week, BEIS finally announced the long-vacant position of Director of Labour Market Enforcement has been appointed, and that funding has been approved for the Single Enforcement Body. Additionally, BEIS has now launched a Call for Evidence for the Umbrella Company Market, which Rebecca Seeley Harris and I have been asked to contribute to. These are positive signs that regulation is finally coming to the umbrella market to protect workers from skims and scams.  

Outlook for specialists

We can also clearly observe a cohort of specialist contractors who have been proactive and understood how to adjust their approach to find and win outside IR35 contracts. These skilled specialists leverage their bargaining and negotiating power and come out on top. 87% of contractors assessed by Qdos were found outside IR35, as reported in the FT Adviser.

We’ve seen evidence of green shoots that outside IR35 contracting is starting to recover. These positive signs, along with the following 5 indicators, give hope to contractors that the market is shifting and outside IR35 opportunities are on the up. 

1. Demand for short-term skill is not going away

Demand for labour across the majority of sectors has been expedited by the pandemic and businesses are struggling to find the talent they need to meet their recovery, transformation and growth plans. When we combine IR35 with Covid-19 and Brexit, this mix of macro-economic factors is having a profound impact on labour supply chains.

Several sectors have already reached crisis point, as seen earlier this year with the shortage of HGV drivers. The reasons behind the HGV crisis are complex, but we do know that IR35 played a significant catalyst in the labour shortage – cited by over half of drivers who are leaving the industry – as shown by research from the Road Haulage Association. 

If contractors take on board one insight, let it be this: history shows the use of the flexible workforce booms after economic shocks. We’ve seen it post 9/11, post-2008 and post Article 50. Here’s an extract from an article I wrote six years ago:

“As we saw in 2008, as companies gained confidence the contracting and consulting market quickly rallied. The market was already recovering whilst the UK was still in deep recession and by the first quarter of 2010 the contracting market was at an all time high. In contrast, it took nearly 6 years for the permanent employment market to recover.”

We know contractors are the first ones out of the door during a crisis (no redundancy consultations, no employment tribunal risk, just a clean contract termination). But they’re the first one back in when confidence to hire perms is in short supply. Therefore, as the economy recovers from Covid-19, opportunities for contractors will continue to increase.  

This boom has already been observed by ContractorUK reporting a 23 year high in demand for IT contractors this year, fuelled by digital transformation.

Data from OffPayroll.org.uk’s outside IR35 contracts section shows the number of outside IR35 contracts have been increasing monthly since August. This bucks the trend of the previous downward trajectory from February, with November showing the highest growth yet. Combined with anecdotal evidence from the OffPayroll.org.uk LinkedIn community, this is a good sign that the outside IR35 contract market is recovering.

As mentioned, the demand for short-term skill is not going away – and we predict it’s about to grow. As the UK continues to recover from the pandemic, specialist skilled contractors will be essential to help deliver key growth projects. As this demand increases, so does the bargaining power of contractors, including demanding fair, individual IR35 assessments.

2. Clients can be convinced

This uptick in outside IR35 contracts is a positive indicator of a change in the market. Many end clients who had previously implemented blanket bans – and had a mass exodus of contractors – are now taking the time to get determinations right. This is a good sign for proactive, switched-on contractors who can confidently demonstrate their outside IR35 status.  

A recent example is Network Rail’s u-turn on PSC bans. In 2019/20, 99% of Network Rail’s 538 contractors were working inside IR35. The company’s 2020/21 accounts show that the number of contractors employed had more than doubled to 1,323 and that 74% of them were assessed as outside IR35. 

This positive news comes at the right time. As HMRC are starting their checks (see point 3, below), companies have had time to settle down after April’s rush. They’ve had time to adjust, and in several cases, rethink their blanket bans. 

A consistent message we’re now hearing from contractors is that many clients are open-minded to conversations about status. Going back to the two-track market, specialist contractors with niche skills who confidently engage with clients on IR35 are successfully influencing their status determinations. 

I recently caught up with Chris, a client here at inniAccounts, and a good friend. I’ve long viewed Chris as a bellwether client for the future of our industry, and a role model when it comes to successfully navigating IR35. He took a proactive approach with his client and was successful in overturning a blanket ban. 

Chris’s story of specialism

“My client did not really know how to engage a limited company contractor directly. They had a sort-of ban on PSCs, but that was my red line – I do not take umbrella assignments, and I remained clear on that point.

“The client had a ‘big four’ advisor who gave an opinion on IR35 status, and this was (despite my best advice to use a proper insurance-backed assessment service such as Qdos) backed up by the client using CEST to give a determination. I proactively helped the client with contract drafting and advice on how to approach clauses to reflect the way we intended to work outside IR35.

“The outcome of the determination was that the assignment was outside IR35. I believe the key determinants of the success in securing the contract, direct with the client and outside IR35, was twofold: I have very niche skills and a good reputation, and I stood firm on what engagement models my company is prepared to accept.

“My advice to contractors is to know your capabilities and whether they are commodity or truly specialist, and to be clear about how you want to engage with clients. Above all else, (I don’t know how many times this needs to be reiterated!) make sure you have enough of a ‘war chest’ to allow you to have the flexibility to say “no thanks, not on those terms.” The message will get through eventually, and the fear of the unknown will be overcome, to the client’s and contractor’s benefit.”

Chris’s story reinforces the importance of proactively managing your client, knowing your business and taking the time to educate them on IR35. Some contractors mistakenly believe that, as the IR35 status determination now rests with the end client, they can rest on their laurels. That’s simply not the case. If you should be outside IR35, you need to be informed, engage in the process, and push with professionalism for the status you deserve.

3. IR35 ‘checks’ are being done by HMRC and clients

HMRC has confirmed it is undertaking compliance checks in the oil and gas, and financial services sectors, despite having previously assured a ‘light-touch’ approach for the first 12 months. HMRC’s approach here has been taken directly from their playbook: they’ve perfected the art of overt activities, such as leaky fishing letters, which cause the wider population to pay attention and act without further intervention.

Remember this? It’s HMRC’s 2012 evasion campaign. They’re using similar scare tactics with IR35 to drive up compliance. (If you’re a data head, check out the research on the effectiveness of this campaign here.)

The timing of HMRC’s investigation is almost certainly intended to scare businesses into being compliant with IR35 / off-payroll rules. In response to this, many clients are being proactive by starting their own audits ahead of HMRC. This is one of the reasons why it’s more important than ever for contractors to manage their ongoing IR35 status. 

Though legal responsibility for determining IR35 status now sits with the end client, contractors need to be prepared for audits, and ready to show evidence to support their outside IR35 status. Your contract may start out outside IR35, but if your working practices betray you, you could find yourself inside IR35 after an internal audit (and you could be facing a retrospective tax bill, too). In contrast, those who are specialists in their niche, knowledgeable about IR35 and can show they are a safe bet when it comes to ongoing compliance are appreciated by end clients.

A recent contributor to OffPayroll.org.uk said that IR35 had given them “much more leverage” with clients and made it “much easier to fight points of contention” around working practices. We know from court cases, such as the Kaye Adams IR35 appeal case, that working practices trump written contracts every time. This is why being proactive and standing your ground are important in not just winning contracts, but maintaining your ongoing outside IR35 status.   

Contractors who show their IR35 knowledge and use it to educate end clients, ultimately helping them to avoid practices that could land them with a hefty tax bill, are an asset to organisations.

4. Clients are waking up to the fact that umbrellas aren’t the least risk option 

Given HMRC’s compliance activities, you’d be forgiven for thinking inside IR35 & umbrellas are the safest bet for end clients. But that’s not the case. There is an opposing tension as there is a real risk that clients could be facilitating tax evasion via rogue umbrella companies, which is a corporate criminal offence.

That’s why end clients are now waking up to the compliance and reputation risk that some umbrellas present to their business. Skims and scams made by umbrella companies are rife with an estimated £4.5 billion misappropriated from workers and HMRC (the business case for the IR35 reforms was around £3bn – is this an own goal for the Treasury?).

Furthermore, end clients found to be using a rogue umbrella could be held accountable for facilitating tax evasion under the Corporate Criminal Offences (CCO) section of the Criminal Finances Act. This branch of corporate criminal law takes a hard line: ignorance or an opaque supply chain is not an acceptable defence for an end client. The only defence available is having reasonable prevention procedures designed to prevent the facilitation of tax evasion. The CCO was enacted in 2017, and it takes a very hard line on offenders:

Guidance from HMRC and recent press coverage has increased awareness of these risks among business leaders. In October, HMRC published guidelines for agencies and businesses on reducing the risk of using a non-compliant umbrella company. The potential consequences for businesses include tax compliance checks, penalties and tax liabilities, criminal charges, as well as the risk of reputational damage if they are involved with an umbrella using tax-avoidance schemes. 

As mentioned earlier, end clients are beginning to kick off their own supply chain audits, which are unearthing worrying findings. Writing on LinkedIn, Rob Sharp from Orca Pay noted an increase in avoidance schemes in the supply chain that had been identified through Orca’s auditing process. 

He warned that agencies and businesses face being deemed an enabler of tax avoidance and risk being “named and shamed as enablers”. HMRC have recently started publishing the names and details of deliberate tax defaulters (another tactic from the playbook), and we may see tax avoidance enablers joining a list too.

Clearly, the risk to end clients of incurring financial penalties and criminal charges by using non-compliant umbrellas is high. There is also a reputational question of ESG / CSR, from being named and shamed as tax avoidance enablers to supply chain ethics, as the use of umbrella companies is at odds with many company’s brand values. Blanket bans, unfair assessments and use of potentially fraudulent suppliers does not align with the ethics that many companies purport to have and the values that their workers (both on and off-payroll) expect from them. In conversations with supply chain auditors, I’ve recently learned that a number of large end clients are now banning umbrellas entirely from their supply chains. Instead, they’re insisting on agency payroll or direct FTCs for inside IR35 engagements.

Businesses are realising that in order to compete in a post-Covid, post-Brexit world, they must attract and retain the talent needed to move forward. So, what does this mean for IR35? Umbrella companies are far from the least risk option when it comes to managing IR35. To get ahead – and stay ahead – of the competition, reduce risk and access the top contracting talent, this starts with businesses getting IR35 right through fair assessments. 

5. More contractors are moving from umbrella to outside IR35 contracts

And finally, the most positive sign we’ve seen that things are changing has come from contractors themselves. In an OffPayroll LinkedIn poll, 41% of contractors said they were either not impacted by IR35 or were on the up. Here at inniAccounts, in November alone, we’ve had record numbers of new clients who are reopening limited companies. Many are joining us from umbrella companies where they’ve left an inside IR35 contract for an outside IR35 contract. 

Since April we’ve sadly seen many clients close their limited company as they’ve stopped contracting, either moving into a permanent role, retiring or working inside IR35. Recently, these closures have slowed, which signals we have passed the peak. Additionally, many excited contractors have contacted us to stop their closure process or reactivate their limited company as they’ve landed a new outside IR35 contract.  

This move to new outside IR35 contracts, from both new and existing inniAccounts clients, is hopeful and indicative of one of our predictions earlier this year. In our State of OffPayroll report, we identified a cohort of highly skilled specialist contractors who had been forced to work inside IR35 due to PSC bans or unfair determinations. At the time, we warned these contractors presented a flight risk, as 79% had a foot out the door and were looking for new clients. 

These signals from the market show success from this cohort of contractors in turning the tide and getting themselves back outside IR35.

Conclusions

Ultimately, these factors combine to a feeling that the outside IR35 contracting market is beginning to thaw. Sectors need contractors and large companies like Network Rail are showing that it’s possible to come back from a PSC ban to manage outside IR35 contracting. With monthly growth in outside IR35 opportunities, the signs are there that more companies are coming around. 

We’ve seen that those who take a proactive approach to getting outside IR35 contracts will reap the rewards. The market is moving forward and those who join the movement will be in control of the conversation and selected over other skilled professionals for their capability. If the past 8 months have shown anything, it’s that the days of working outside IR35 by accident are long gone. You must be proactive.

This means contractors can’t be hands-off when it comes to their IR35 status. From securing a contract through to educating clients and managing working practices, it’s clear that to work outside IR35 successfully in 2022 and beyond, contractors must take control and continue to lead the way.