New research has warned that the UK’s reforms to the IR35 tax code for contractors is stifling access to specialised talent and having significant ramifications for UK business growth in the country’s IT industry.

According to findings from insurer Kingsbridge Contractor Insurance, 50% of businesses reported that IR35 was the biggest obstacle to hiring contractors over the past 12 months.

The IR35 rules apply to off-payroll workers, such as contractors or anyone working through an intermediary. The rules aim to ensure these workers pay similar taxes as employees.

In effect, it deems that anyone who would meet the definition of ‘employee’ should be deemed an employee.

Since April last year, regulations placed the responsibility of deciding if IR35 applies on to medium and large-sized clients. For smaller businesses, the worker or their intermediary is responsible for deciding if IR35 applies to them.

The IT sector currently relies heavily on specialist contractor skills, with over 91,470 contractors and freelancers working in the industry.

The research also warned that over 70% of businesses and recruiters have seen a drop in their limited company PSC contractors since the reforms. 66% of contractors have said they would not even consider an inside IR35 role.

It also found that half of contractors in the UK have considered closing their businesses, retiring, with a quarter seeking work outside the UK.

For the IT industry, Kingsbridge warned that IR35 is restricting access to a much needed, highly skilled, flexible workforce.

CEO of Kingsbridge Contractor Insurance Paul Havenhand said: “We have a unique position in the marketplace to be able to see the impact of IR35 from the different perspectives of contractors, recruiters and end clients.

“The UK economy is being hampered by a severe recruitment crisis, with many IT businesses struggling to fill vital roles. Contractors, as a highly skilled, flexible resource, could be providing a much-needed interim solution to keep things working and avoid major disruption to UK businesses. Yet the complexities of IR35 and perceived risks are putting businesses off.”

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According to the company, more education on IR35 is required.

In addition, it said that the Check Employment Status for Tax (CEST) tool must be made fit for purpose and take Mutuality of Obligation (MOO) into consideration.

It also said that companies can legitimately hire experienced contractors outside of IR35 but, to do this, the use of purpose-built tools, advice and insurance should be sought. This will provide the right process to mitigate against the perceived risks of hiring contractors.

Head of Tax at Kingsbridge Contractor Insurance Andy Vessey said: “HMRC was severely under prepared for the private sector reform, and CEST simply isn’t fit for purpose.

“However, there are some signs of positive change. There are more U-turns on blanket bans and contractors are optimistic about their future job prospects.”

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