UK businesses that fail to assess contractors fairly and continue with a blanket PAYE or umbrella approach risk losing their competitive advantage in the flexible skills market, according to new research.
A survey of 491 self-employed freelancers, contractors, and consultants, conducted in April 2021, identified a strong correlation between companies that attract the best flexible talent and fair IR35 assessments, as well as the emergence of a two-track market of specialist consultants with bargaining power, and generalist contractors without.
Since the government’s off-payroll reforms – intended to prevent tax avoidance – came into force in April, 36% of contractors are now operating outside IR35 (defined as being a genuine contractor) up from 16% in February.
Just over one-third are deemed inside IR35 (defined as an employee for tax purposes) or subject to a personal services company (PSC) ban, while 29% do not currently have a client or are waiting on or are challenging a determination.
More than half (55%) of the contractors operating outside IR35 said a shortage of skills in their industry had increased their bargaining power with clients, to the extent that 70% of this cohort said their status was determined fairly by clients.
However, more than three-quarters (77%) of those inside IR35 or subject to a PSC ban claim the status determination had been conducted unfairly, compared with two-thirds (67%) of those determined outside IR35 who said they were fairly assessed.
Disquiet over status determination was found to be affecting brand reputation with 47% of contractors saying there is a difference between how their clients publicly say they treat employees and suppliers compared to how they have been treated.
Almost half (46%) of contractors would not recommend their clients to others and 82% of those determined inside IR35 are looking for new clients.
Companies that engage with contractors fairly and capitalise on this trend will have their pick of the talent and will win competitive advantage
“We know companies turn to a highly skilled flexible workforce when they need to implement strategic change or shift up a gear after an economic shock,” said Poyser.
“These findings should act as a warning to any company following a strategy of short-term skill for long-term recovery and growth. Highly skilled contractors know their worth and will not entertain the prospect of being pushed inside IR35 by unfair processes or blanket PSC bans.”
Poyser said the evidence suggests there is a growing cohort of contractors unafraid of establishing greater bargaining power in terms of working arrangements and rates and will only engage with fair end clients.
“They know the value they will deliver is of critical importance as the economy recovers. So much so that those with niche and high demand skills are twice as likely to find an outside IR35 contract,” he continued.
“As such, a two-track market of specialist and generalist contractors and consultants is emerging. Companies that engage with contractors fairly and capitalise on this trend will have their pick of the talent and will win competitive advantage.”
Poyser added that for contractors the message is clear: “Some end clients are clearly switched on to making the most of the market divergence. Contractors who prioritise developing their in-demand skills will therefore win out. They will have greater bargaining power and in turn a great likelihood of findings outside IR35 roles.”
The research also shows that the contentious issue of employment rights underlines why regulation of the umbrella market is urgently needed.
Some 71% of those inside IR35 are being paid by an umbrella company, with 35% unsure if their payslip has a clear breakdown of holiday pay. Only 20% of contractors would recommend their umbrella.
When asked how optimistic they felt about their contracting career compared to the same time last year, contractors outside IR35 were cautiously optimistic compared to the contractors inside IR35 or subject to a PSC ban who are pessimistic about their future.
This all amounts to growing discontent among contractors, with 81% of respondents saying they would consider joining a class action against their client to seek employment rights, and 78% of those inside IR35 want full employment rights and benefits.
The latest Labour Force Survey showed there were 4.3 million self-employed workers in the UK in the first quarter of 2021. The figure is still 617,000 lower than during the same period in 2020 as the covid-19 pandemic began to take hold in the UK.