HMRC-commissioned report says most recruiters unaffected by upcoming IR35 reforms

A new report commissioned by Her Majesty’s Revenue & Customs says that most recruitment agencies have experienced “no impact” as a direct result of the upcoming implementation of the IR35 reforms for the private sector on 6 April.

The report, ‘Effects of the off-payroll working reforms on agencies’, also sheds limited light on the effects felt by recruitment agencies after the 2017 reforms for the public sector, saying that “many” reported that the number of contractors on their books remained stable or increased in the aftermath. 

Conducted by IFF Research on HMRC’s behalf, the research was carried out between November 2020 and January 2021. The total number of recruitment agencies interviewed for the report was just 34. Twelve agencies that work with clients in the public sector participated in an interview around the effects of the 2017 reforms. The industries represented amongst the agencies interviewed included healthcare (8), engineering/construction (6), IT/marketing (6), transport/logistics (5), financial services (4), manufacturing (3).

The only statistics included in the report are the numbers of contractors respondents had. The terms “some” and “most” are used to quantify responses.

Cautious acknowledgement of issues with the controversial Check Employment Status for Tax (CEST) tool is included, with respondents describing it as “too binary”, “too general” and “not tailored to all circumstances”, for instance. One respondent said: “The worker will generally get the answers that they want, and the hirer will get the opposite. They will interpret those questions differently.”

Among areas of improvement needed, respondents pinpointed the need to be able to more easily contact HMRC and to provide more easily digestible information about the reforms, such as through short videos. ”It needs to be in layman’s terms rather than jargon,” a respondent said. Another said: “It’s written as if they write these things to deliberately confused. I’m not an idiot but it confuses me.”

In reference to the 2017 reforms, the carefully worded report said that changes were seen in the number of contractors on agency books were “not always” a direct result of the reforms. Increases were often attributed to wider business development and growth “particularly among private sector clients”. 

“Some” agencies reported a decrease in the number of contractors on their books since 2017, and the report said that when this occurred, “it was more common for this decrease to be attributed to external factors rather than the 2017 reform, particularly the UK’s exit from the EU and the Covid-19 pandemic. It also said “some” attributed the decrease to the 2017 reform, reporting that it had reduced the supply of and demand for contractors.

Further, “some” agencies reported that the rates paid to contractors in the public sector increased after the 2017 reform, the document said. “Public sector clients subsequently yield to the pressure from contractors to increase rates”, a trend “most prominent” in the IT and healthcare sectors, the report said. “A couple of agencies mentioned their clients had struggled to afford the increased rates required to remain competitive,” it added.

At the same time, the report said, “some” agencies said that contractor rates had not increased because of the 2017 reform.

With regard to the upcoming 2021 reforms, the report said “some” agencies reported early signs of contractor numbers decreasing in the lead-up to April 2021. “A few” agencies mentioned seeing early signs of client demand for contractors working through personal service companies (PSCs) ahead of 2021. “In their place, most clients had opted to use contractors that worked through different structures,” the report said.

The report does not provide recommendations or conclusions.

Commenting on the research, Dave Chaplin, CEO of ContractorCalculator and IR35 Shield said: “The qualitative survey interviewed 34 agencies out of the 20,000 that we know will be affected by the new legislation, so it is important to understand that this only represents the views of 0.17% of them.

“Moreover, it has been filtered through the lens of an HMRC commissioned survey and HMRC has spent the last five years pushing these nonsensical reforms through Parliament against considerable resistance. It would not be difficult to find 34 other agencies, cherry-pick some evidence, and frame it in a way that draws conclusions that are entirely contrary to what is being said.
“The Lords did not hold back in their assessment of the IR35 rules, calling them ‘riddled with problems, unfairness and unintended consequences’ and that is exactly what our sector has witnessed in the public sector and will continue to see happen when the new rules take effect in the private sector.”

Also commenting was Tania Bowers, legal counsel for the Association of Professional Staffing Companies (APSCo): “The research revealed a number of insights that were to be expected, with some recruitment firms already noting a drop in contractor numbers and client demand for PSC contractors.”

Bowers also noted that respondents had questioned the reliability of the CEST.

However, she pointed out, “with preparations for off-payroll now finalised or in the process of being completed, it is too late to make any meaningful change”.

Bowers added: “The fact that just 34 staffing companies were surveyed does bring into question the reliability of this research, as it is unlikely to provide a comprehensive picture of the entire recruitment market.”

Editor’s note: HMRC responded yesterday after press deadlines. We will be running their full response on Monday 29 March.

The entire report can be accessed here.

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