IPSE, The Association of Independent Professionals and the Self Employed, has released its second annual “IR35 Spotlight” report detailing research findings from employers and contract workers on how IR35 has impacted the supply and demand of contractors.

The report focuses on three key findings; that one in 10 contractors currently out of work say it is due to IR35 reforms, 55% have rejected work in the last year due to “inside IR35” determinations, and 24% are looking to work overseas to escape the rules. The findings are similar to those from the associations first report published in 2023.

These findings cover all business sectors, and undoubtedly there will be some industries affected more than others. What is universal is that there is a clear lack of consistency in the way the rules are applied which is having an impact on the recruitment of contractors.

In the built environment sector, we can identify four ways IR35 will have an increasingly negative impact, if employers do not shore up their processes. The good news, is that employers who take the time to invest in a fit for purpose process, including demonstrating a clear understanding of their obligations and a good assessment tool, can mitigate risk of penalties. The reward is access to a talent pool many competitors can’t access.

Understaffing inhibits growth.

It goes without saying that if there is a shortage of skilled workers generally, that any barrier to tapping into the contract workforce will further compound the issue. The RICS construction productivity report, released in April 2024, shows that the availability of skilled workers has the highest impact on construction productivity of any of the identified “productivity interventions”. The opportunity for labour market interventions, or corrective measures, in the case of the UK built environment, is clear, and within this, IR35 clarity could play a significant role.

Driving many skilled workers to remain economically inactive.

The report states that 18% of respondents not working are not currently incentivised to return to the workforce. In many sectors where the primary reason for deploying a contract workforce is to overcome a skills gap, this is making the market even more challenging. With over 50% of respondents not currently working stating that this is due to IR35, there is clearly a lot of work to be done by employers to ensure they have measures in place to ensure they can on board contractors easily, efficiently, quickly and most importantly – compliantly. If they do, the opportunity to tap into a passive talent pool that is otherwise not motivated to engage, is huge.

Driving up pay rates a to compensate for higher tax bills.

IR35 means that anyone working inside IR35 as a contractor will pay more tax than a permanent employee as they are responsible for both employee and employer NIC. Employers are legally obligated to provide contractors with a status determination statement (SDS) as the result of a documented assessment to determine if a job is inside or outside of IR35. Small companies are exempt, but otherwise, a robust assessment process is needed to mitigate the financial liabilities of both the employer and employee. IPSE’s research shows that 55% of contractors rejected work based on an inside IR35 determination. The reality is, that if the hire is critical, the contractor will be in a strong position to drive hourly rates upwards, to compensate for higher tax bills. With the added pressure of the high cost of raw materials and energy, there is little margin available to satisfy demand.

Generally causing confusion and delays to the hiring process.

IR35 off payroll rules were first introduced into the public sector in 2017, then rolled out into the private sector in 2021. Yet still, there is a distinct lack of clarity, with many employers having opted to shy away from using contractors at all and many contractors, as the research shows, opting to remain inactive. We continue to see a lack of understanding of the legislation which is causing delays in the hiring process.

Learn more about IR35 on our dedicated resource page.

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