UK businesses using contractors and freelancers have faced significant cost increases since the introduction of changes to the ‘off payroll working rules’ or IR35, research by Brookson Legal has revealed.

More than three-quarters of firms (87%) that use contractors have been forced to increase rates to attract talent since April 2021, with three-quarters (75%) forced to raise these rates by more than 10%. During an ongoing national skills shortage, as the economy grows post-pandemic, 77% are now finding hiring flexible workers to be challenging (48%) or very challenging (29%).

This perfect storm looks set to continue into 2022, as 90% of these companies plan to extend their use of contractors over the next 18 months to support business growth.

Brookson Legal has published its research report, Reassessing IR35: The unspoken opportunity for growth, six months on from the introduction of the changes to the off payroll working rules in the private sector. Based on the views of 500 senior decision makers with responsibility for IR35, it explores how a robust IR35 solution can support businesses to become more agile, while increasing visibility of the contingent workforce and reducing costs.

Fear of HMRC fines was initially thought to be driving business behaviour over IR35. Of the businesses surveyed, however, commercial risks such as contractor costs (53%), talent attraction (42%) and project delays (42%) have been identified as higher risks of a bad IR35 solution than unforeseen tax bills (31%).

Matt Fryer, Head of Legal Services at Brookson Legal, the only law firm regulated by the Solicitors Regulation Authority that focuses on IR35 matters, said: “For businesses that rely on the contractor workforce to deliver projects on time and to budget, access to a talented flexible workforce is vital to growth.

“With job vacancies reaching an all-time high, presenting an attractive, compliant and competitive IR35 offer to talent is the best way to regain some control in an uncertain environment. It is also crucial to unlocking the benefits of a truly flexible workforce in the longer term. A robust and evolving IR35 solution will not only help companies recover and grow in the wake of the pandemic, it will ensure they are more agile and able to scale their workforce up and down to meet project needs.”

An understanding of the importance of IR35 is strongly linked to where responsibility for the legislation lies within the business. CEOs takes responsibility in over half (56%) of businesses surveyed and the Board in another quarter (24%). But this does suggest in the remaining 20% percent of businesses, their IR35 strategy is not considered as a significant governance issue and is delegated to other departments.

Of more concern, is that the data suggests that many organisations may feel a false sense of confidence in their approach to IR35 compliance. Nearly 90% of businesses believe their IR35 solution meets HMRC’s guidelines for reasonable care, however many determined their contractor status through the use of CEST (47%), other automated online tools (42%) or agency and contractor assessments (31% and 35%).

Matt Fryer adds “These approaches carry both the risk of tax liabilities from HRMC and can create barriers to growth if not used correctly, which will likely increase the cost of resourcing even further. For businesses that implemented these quick-fix solutions, now is the time to act and put in place a robust IR35 solution ahead of HMRC’s soft landing period ending in April 2022.”