The majority of professional recruitment companies expect umbrella company usage to soar in response to changes to IR35 in the private sector, according to new research from the Association of Professional Staffing Companies (APSCo).

On 11 July, HMRC  published draft legislation extending IR35 off-payroll working rules to the private sector from 6 April 2020.

A survey of the trade association’s membership found that 91% of the professional recruitment firms polled believe that an increasing number of contractors will shun personal service companies (PSCs) and turn to umbrella companies due to the new rules.

In addition, when the same group were asked if they expect most of their contractors to agree to working ‘inside’ IR35 after the changes come into effect, two thirds (67%) said ‘no’.

Previous research from APSCo following changes to off-payroll working in the public sector in 2017 found that 55% of professional recruitment companies had witnessed a drop in the use of PSCs, with most of this movement into umbrella companies.

Samantha Hurley, Operations Director at APSCo and Co-Chair of HMRC’s IR35 Forum, commented on the findings, “It is unsurprising that our membership expects an increase in umbrella company usage: it is reasonable to expect that employers which engage contractors directly are likely to be seeking ways to mitigate risk. Contingent workers, meanwhile, look set to increasingly move away from PSC solutions if their assignments are caught by the new rules.”

“However, while the majority of service providers are compliant and ethical, there are exceptions to the rule,” Hurley said. “Following changes to IR35 in the public sector our members reported an increase in unscrupulous umbrella companies which were very willing to exploit contractors’ wishes to make up some of the shortfall in income because they were being taxed as employees. We essentially saw non-compliance in the umbrella sector replace non-compliance in the form of false self-employment.”

For more on IR35, refer to SIA’s report ‘IR35 Off-Payroll Working Rules: FAQ’.