The hotly contested IR35 reforms have been busy transforming employment in the private sector since 2021, leading to the heightened scrutiny of contractor engagements across the UK.

Initially designed to mitigate the long-running challenge of ‘disguised employment’ (when an independent contractor does the job of a permanent employee), the 2021 IR35 reforms were among the most impactful changes in employment regulation for decades.

In practice, the reforms have been met with considerable backlash from both contractors and employers alike, largely down to:

• The threat of double taxation (something HMRC has been repeatedly criticised for)  

• A lack of clarity around IR35 classification

• Increased compliance burdens

• The potential for reduced rates for contractors

• Limited flexibility for enterprises (particularly when IR35 pushes them towards permanent employment structures).

The April Update

A major update to the IR35 rule came into effect on April 6th, 2024, enabling HMRC to consider taxes paid by the contractor (and intermediaries) when calculating the PAYE liability of the employer, potentially reducing costs for businesses. Essentially, it’s an offsetting scheme that applies to misclassified contractors.

For example, if an employee treated as operating outside IR35, is later determined to be inside IR35, HMRC can now offset taxes already paid by the contractor’s personal service company (PSC), reducing the risk of businesses being penalised if a worker’s status is reclassified.

This is aimed at reducing the burden where clients and intermediaries would be liable to pay taxes on the same income.

It might seem like a small change on the face of it, but given the reduced risk it represents to employers, it could lead to an increase in hiring activity for roles that sit outside IR35.

Financial Viability

Employers could develop a stronger appetite for hiring contractors under the new IR35 format, as the update appears to take the sting out of the penalties for misclassification (and the associated tax liabilities).

This represents a chance to increase confidence throughout the recruitment process, leading to a more dynamic contract market.

Hiring managers will likely need to reassess their hiring priorities in a bid to streamline their recruitment and make the most of the new changes.

We’re awaiting a slew of regulatory updates from the new labour government, including the introduction of the polarising (in many corners of the contracting community) Single Worker Status.

Until then, it’s important to stay in the loop. Our specialist compliance consultants are here to answer any questions. Reach out directly to Dan Tapsell, Director of Contract Recruitment to find out more: https://www.broadgatestaffing.com/consultants/daniel-tapsell.

If you’d like to know more, keep your eye out for our upcoming breakdown of the IR35 legislation, how to navigate it in the contracting space, and what it means for the future of hiring: Insights from Broadgate.