Exclusive: Business confidence growing amongst construction contractors despite IR35 reform

One year on, the confusion following IR35 reform has changed the landscape for contractors, making it harder than ever for them to work in the UK.

New research amongst contractors, recruiters and end clients by insurer and IR35 specialist, Kingsbridge Contractor Insurance, reveals that the reform has had a dramatic and inhibiting effect on businesses’ willingness to hire contract labour.

The data shows that over 70% of businesses and recruiters reported that they had seen a reduction in their limited company PSC contractor workforce. In fact, 50% of businesses cited IR35 as the biggest obstacle to hiring contractors over the past 12 months, despite the ongoing challenges posed by Brexit and COVID.

Alongside a nervousness about the potential risk of misinterpreting IR35 rules, increasing day rates have had an impact on businesses’ willingness to work with contractors. The research shows that 65% of contractors would try to negotiate an increased rate if placed inside IR35, with respondents suggesting that this could be up to a 25% increase.

This is already the case for many. 37% of contractors deemed inside IR35 have seen their day-rate increased in the last 12 months, compared to 20% of contractors deemed outside IR35. So, businesses are almost twice as likely to have to pay a contractor more to work inside IR35.

Many businesses have reacted to the challenge by placing blanket bans on contractors or only hiring for inside IR35 roles. Outside IR35 roles now account for just 41% of the roles on offer. This is vastly misaligned with the roles that contractors are looking for, with 71% of contractors surveyed reporting they are looking for outside IR35 roles. 66% of contractors said they would not even consider an inside IR35 role.

This changing approach amongst businesses, coupled with the potential tax implications, has made it much harder for contractors to work in the UK. 50% have considered closing their business, retiring, or leaving the country entirely because of the IR35 reform. In fact, a quarter of the contractors surveyed are seeking work abroad.

The research, which is the focus of a new whitepaper, IR35 - One Year On, reveals that HMRC’s CEST tool is not fit for purpose and is having a direct impact on contractors’ ability to work in the UK, and therefore the decreasing pool of contractors.

38% of the recruiters who stated their end clients use CEST have seen a 61% or greater reduction in their contractor pool, compared to 23% who use independent employment status tools.

End clients can’t rely on CEST to give a clear inside or outside status determination because it produces indeterminate results 21% of the time. This can cause concern over unresolved status matters, forcing end clients to err on the side of caution, resulting in an inside IR35 determination.

Of those contractors who have had an inside IR35 determination in the last 12 months, 90% did not find the appeal process easy or believe they did not have a fair hearing.

However, there are some signs that the situation is improving. Recruiters are beginning to see end clients making U-turns on their blanket ban decisions and anticipate fewer bans in the future. Plus, whilst some contractors don’t feel positive about the future (29%), a growing number (42%) report feeling confident about the future working comfortably outside IR35.

Speaking to Design & Build UK, Andy Robinson, Kingsbridge's Commercial Director, said: “Our research found that a growing number of construction contractors, 48%, feel confident about business prospects in 2022. While more action still needs to be taken in order for the market to fully recover from the changes, the building sector’s resilience and flexibility has enabled it to successfully defy adversity and embrace the reform.”

Andy Vessey, Head of Tax at Kingsbridge Contractor Insurance and leading IR35 expert says: “Whilst there have been significant challenges, and end client projects have ultimately suffered, progress is being made and there are signs of positive change as businesses become more familiar with the risk associated with their IR35 responsibilities. With labour market forces favouring contractors, this group will be leading the charge. They will be able to be more selective, rejecting inside IR35 roles or increasing their rates to ensure their net fee is unaffected.