Time’s almost up to oppose private sector IR35 reform

Today is the final day contractors have to put across their views to policy-makers about Off-Payroll Working in the commercial sector from 2020 -- also known as private sector IR35 reform from this coming April, which is widely seen as the most significant update to the legislation since its introduction two decades ago, writes Julia Kermode, chief executive of the Freelancer and Contractor Services Association.

We are among those who believe that the impact on contractors and the companies that hire them as limited companies (or Personal Service Companies), is going to be huge. It is therefore vital that everyone who stands to be affected has their say and is heard.  

Be in no doubt; the Off-Payroll Working reforms in the public sector – which the private sector framework is going to be based on -- have had a devastating effect. And that’s just since their introduction in April 2017, and the effect has been on our public services.

Nonetheless, the government seems to be standing firm in its belief that extending IR35 reform into the commercial sector (at all engagers except, for now, ‘small companies’) will remove any disparity between the public and private sectors and, as they like to say, ‘level the playing field.’ In reality, the extension of the IR35 reforms will have a significantly adverse impact on the UK economy, just at a time when the country can least afford it.

In fact, businesses have a lot to contend with right now and I am deeply concerned about the UK’s position in the global marketplace. Simply put, if the government makes it too difficult or expensive for businesses to access the most skilled and flexible part of the UK workforce that they need within the UK, then why should they, or other businesses looking at the country from overseas, do business here? The knock-on effect for contractors themselves – the talent being regulated against -- looks set to be unparalleled.

We only need to stand back a little to gauge the sheer size of the fallout that’s incoming. Indeed, when the same model of IR35 reform hit the public sector in 2017, many public services simply knee-jerked and put all their contractors ‘inside IR35.’ This was actioned to avoid any come back for the engager or their agencies.  But it has resulted in many contractors being taxed at a similar rate to employees, but without any of the employment benefits that come with a permanent position as an employee. A little at odds with the government’s ‘level the playing field’ rhetoric.

Further based on what we have seen happening in the public sector since the off-payroll reform of two years ago, I see three main outcomes of the legislation hitting the private sector. 

1. Assignment rates for contractors not changing

The upshot of this is that skilled British contractors will receive less income and ultimately, get taxed as an employee -- but without the 84 statutory rights and benefits that come with being employed.  A result of this, I’m certain, will be a legal case -- a challenge in court by a contractor who is being taxed as an employee without any of the rights of an employee. 

2. Assignment rates for contractors changing

So yes, the opposite of the above in 1). In this scenario, some rates will be increased which will have to be funded by the business which is engaging the contractor. Work will therefore cost more -- although output and productivity will remain the same. Just what our Brexit-challenged economy could do without.

3. Contractors may quit

So regardless of rates moving at some outfits, and not moving at others, contractors could simply choose to leave behind their freelance operation or provision of services, exactly as they have already done in the public sector. 

Our own internal analysis of official ONS data suggests that since the 2017 changes to IR35 at taxpayer-funded bodies, many contractors have simply chosen to exit their profession altogether. So rather than transfer to any alternative form of ‘employed for the purpose of tax’ status, these skilled individuals and providers have just shut up shop.

This third option has many unwanted implications. Project delay has been one of the well-documented impacts of IR35 in the public sector already.

Transport for London has revealed a ‘significant number’ of contractors stopped working on projects as a result of the IR35 changes. This move led to skills shortages and the significant delay of critical repairs. We are also aware of important IT projects within the health sector which have been put ‘on hold’ due to skills shortages.  

These are just two examples of major end-users out of the many who engage contractors where the results since IR35 changed have been plainly negative. And now the government wants to make broadly the same IR35 changes in the profit-making sector. The concern is that it’s very unlikely that private sector outfits will have the luxury of being able to put projects ‘on hold,’ as there is no choice for them but to deliver their normal outputs within the competitive marketplace. 

Another concern is that many more contractors and businesses than anticipated will be affected by the roll-out, as large concentrations of private sector organisations still seem very much uneducated and (worse) ill-informed about the changes coming their way in a little over 10 months’ time.  And if it doesn’t fully understand what’s afoot, UK plc may simply react by choosing to take a ‘blanket’ approach when applying IR35 – i.e. PSCs will be ruled as inside IR35 or just no longer engaged. This would trigger a UK-wide skills shortage for the nation’s businesses. Or a more severe shortage where shortages already exist, such as in IT (according to the very latest agency staffing reports.)

There’s likely to be direct pain for contractors too, if the proposed IR35 reforms go ahead unchecked. Since the IR35 legislation was reformed in the public sector, we have witnessed an exponential proliferation of tax avoidance schemes. These have sprung up widely, and are an inevitable consequence of the off-payroll working framework.

With a reduction in income, large numbers of contractors working in the public sector have been aggressively targeted and enticed by schemes that offer them increased take-home pay compared to PAYE.  These should be avoided at all costs. Tax avoidance schemes that claim to reduce their users’ tax and NI contributions by disguising remuneration as ‘something else’ such as annuities, loans or even marketing vouchers, are non-compliant.  And so the reality is that the tax and NICs will still be due by the contractors, and as we are seeing, HMRC will relentlessly pursue the individual for this, and with interest, particularly now that the loan charge has come into force. 

So however tempting, contractors must resist such schemes as they will be exposing themselves to significant financial and personal risk.  These schemes must be stamped out as a matter of urgency before any IR35 reform reaches the private sector, otherwise the situation is set to get worse. And we know from evidence that the Loan Charge APPG has received, that right now the situation includes hard-working contractors feeling so alone, lost and isolated that they have killed themselves.

It’s difficult to think of something graver than your fellow contractors taking their own lives as the sort of thing you should be objecting to the government about in the strongest terms, as a potential impact of IR35 reform in the private sector. We’ve been pointing out to the government what’s happened because of IR35 reform since April 2017 and what’s bound to happen from April 2020. For the future health of contractors and contracting, you’ve got until 11.45pm tonight to do the same. You can email your thoughts and comments to the consultation at: offpayrollworking.intheprivatesectorconsultation@hmrc.gsi.gov.uk

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Written by Julia Kermode

Julia Kermode is Chief Executive of the Freelancer and Contractor Services Association (FCSA), the market-leading membership body for umbrella employers, contractor accountants and CIS payroll service providers that specialise in supporting the contingent workforce.
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