Tax hikes and Employment Rights Bill driving firms to contractors
Business pressures from increased national insurance costs and the upcoming Employment Rights Bill are prompting leaders to seek alternatives to stay afloat, including going off-payroll by drafting in contractors.
“Accessing on-demand talent for one-off projects and controlling costs and keeping headcount down are the main reasons that firms hire contractors,” explained Dave Chaplin, CEO of tax compliance firm IR35 Shield, adding that being agile and lean is essential to stay competitive.
Last week, the new jobs report revealed that over the year, there were 149,000 fewer payroll employees, while the unemployment rate remained unchanged at 4.7 per cent.
When changes to business rates come into force next April, it was reported that rates could rise by an estimated 26 per cent across the capital, from £9bn to £11bn.
Rebecca Seeley Harris, expert at Re:Legal Consulting, stated: “It is no surprise that businesses are looking to engage off-payroll.”
However, businesses need to be aware of the off-payroll working rules (IR35), which refer to legislation designed to identify contractors and businesses that are avoiding paying the appropriate tax by working as ‘disguised’ employees.
Kate Underwood, managing director at Kate Underwood HR and Training, stated: “Don’t get me wrong, contractors can be a great way to grow your business. But if they look like a duck and quack like a duck, the tax office might say they are a duck.”
HMRC has stepped up its enforcement against IR35 over the last few years, targeting prominent individuals, mostly presenters, who provide their services as contractors through their own service companies.
Low risk
Despite that, Seb Maley, CEO of Qdos, pointed out that businesses are rethinking their approach to the IR35 rules.
“Where lots of firms were once reluctant to engage contractors due to the perceived risk of doing so under the wrong IR35 status, we’re now seeing a U-turn,” he said.
IR35 rules have long been criticised for how complex they are and for adding extra burdens on contractors and businesses, but Chaplin explained that regulations were updated in April 2024 to ensure businesses did not unfairly suffer due to status misclassification.
“The actual risk to a firm for status misclassification is around 8-10 per cent of the fees paid for a contractor’s services. But, provided a robust compliance regime is implemented, the likelihood is that an HMRC compliance check will cause problems is very low.”
“More businesses than ever realise that the IR35 rules are perfectly manageable and that contractors can be compliantly engaged when thorough IR35 status assessments are made,” Maley added.