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It's the UK contractor tax factor: IR35 outsiders gaining leverage in skills market, survey finds

New tax rules see a hike in use of umbrella companies - another can of worms

Contractors able to continue working outside the IR35 regulations are gaining leverage in the market and succeeding in punting their scarce skills, according to a survey.

Responses from 491 self-employed freelancers, contractors and consultants in March and April showed 55 per cent of contractors outside IR35 say a shortage of niche skills has increased their bargaining power with clients.

Reforms to IR35, which critics argue classes contractors as paid employees without the employment benefits, were introduced in the private sector in April this year, after a year’s delay due to COVID-19. The new rules put certain liabilities on employers and make it more difficult for contractors to place themselves outside the revamped tax rules. Some employers have introduced blanket bans on contractors working outside IR35.

Despite being said to be “riddled with problems, unfairnesses, and unintended consequences” in a House of Lords report last year, the rules got the go-ahead in Parliament and came into law in April.

The new research [PDF], by, which set up the campaign group, also revealed 70 per of contractors not deemed to operate within IR35 said their status had been determined fairly by clients.

James Poyser, CEO of inniAccounts, argued that as these contractors “know their worth and will not entertain the prospect of being pushed inside IR35”, businesses that use freelancers would be wise to leave open the door to outside-IR35 arrangements to ensure they access scarce, in-demand skills.

However, the research shows those inside IR35 were not getting the same bargaining powers with employers, despite skills shortages in their areas of specialism. Of this group, 84 per cent said their status was determined unfairly by employers, according to the research.

The survey also appeared to show the increasing success of contractors in attaining a status outside IR35. In Feb 2020, 16 per cent of contractors were determined outside IR35, but by April 2021, that figure had grown to 36 per cent.

The report quoted anecdotal evidence that contractors were using third parties to support their claim for outside IR35 working.

Inside IR35, the study produced evidence showing the new tax rules were supporting the growth of umbrella companies: 71 per cent of those inside IR35 are being paid by an umbrella company.

Campaigners have argued that some umbrella companies are withholding holiday pay and skimming off pay entitlement through opaque fees. An effort by MPs to amend the 2021 Finance Bill to curb any such behaviour failed last week. ®

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