Spending Review 2020: Defiant chancellor reveals IR35 reform delay cost a ‘shocking’ £740million

A defiant and unapologetic Rishi Sunak yesterday unveiled Spending Review 2020, turning down appeals to help umbrella or limited companies and revealing a potential reason why.

Buried in the small print of his 122-page review, the chancellor calculates that his March decision to delay private sector IR35 reform for the contractor sector cost £740million.

In tax year 2020/21, his Treasury was planning to raise £1.17billion, but he now predicts that the delay until April 2021 forfeits £1.09bn, leaving HMT a paltry yield of just £75million.

Although £405m of that forfeit is made up in 2021/22 (when the reforms come into force), the chancellor will be left yielding just 61% of the revenue he forecasted for those tax years.

Page 13/ (45) of his review compared to Budget 2018 forecasts further reveals that, similarly costly for him, HMT’s total take-home from the reforms is down, from £3.1bn to £2.4bn.  

'Shocking'

Seb Maley, CEO of Qdos says that the projected cost for the government of postponing the off-payroll reforms for 12 months, as the contractor sector wanted, is “shocking.”

Mr Maley also told ContractorUK: “The government is of the view that the decision to delay IR35 reform by just one year will cost the Treasury an eye-watering £740million.

“The projected cost of postponing these IR35 changes could have played a part in the government’s decision to allow contractors, along with millions of other freelancers working via a personal service company, to fall between the cracks of coronavirus support.”

Indeed, Spending Review 2020 contains no new financial help for limited companies, despite a scheme to help them through the pandemic being outlined in detail to HMT just last week.

'Very petulant'

The founder of ReLegal Consulting Rebecca Seeley Harris, the status expert who drew up the Directors' Income Support Scheme (DISS), told ContractorUK last night:

“[What] really annoys me now is the blatant disregard for an entire sector of the business population that has been excluded just by virtue of their choice of entity.”

Alluding to calls from Greater Manchester mayor Andy Burnham for Mr Sunak to at least recognise the plight of PSCs, she said it was “very petulant…to not even acknowledge them.”

“If the government doesn’t like limited companies,” the ex-OTS adviser added, “then legislate. Don’t oblige taxpayers or accountants to make a decision based on subjective morality.”

'Directors desperately deserve more support'

Acknowledgement of both DISS and PSCs was sounded in parliament yesterday by the SNP,  notably by Martyn Day, who said directors “desperately deserve” more financial aid.

Referring the chancellor to the scheme by name, the SNP’s Alison Thewliss said Mr Sunak ought to apologise for knowingly leaving behind three million people (as ONS data implies).

But rather than just refusing to say sorry, the chancellor went on the offensive. “It’s not a number I recognise and I don’t think it’s right to describe those people as excluded.

“One-and-half million of that number are people who are not majority self-employed. Now, that was a decision that was taken to help target support at those who really need it.

“Because if you earn the majority of your income from employment,” Mr Sunak continued, “then it is reasonable to assume you will benefit from the furlough scheme.

“Now that principle, at the time, was supported by every trade association who I spoke to in designing the scheme. And in fact, those conversations were supportive of a much higher threshold than the one that we adopted which was just a majority.”

'Disheartening'

Visibly rattled, the chancellor added: “Also, those 1.5million people who are not majority self-employed, on average, the median amount of self-employment income that they have .. is somewhere between two and three thousand pounds. So it is not the overwhelming part of their earnings and at that level, the Universal Credit system and other support will provide will be significant in making up the difference.”

On behalf of what they count to be two million PSCs and the 7.5million workers they employ, Forgotten Ltd told ContractorUK that the chancellor’s offering was “disheartening.”

The group’s Gina Miller said it was especially so because the Spending Review was his perfect “opportunity” to help -- given that he has failed to reply to their DISS submission.

“With many directors unable to qualify for grants, and furlough leaving them unable to work, the ‘back bone of the British economy’ has been left with only debt and potential insolvency,” Forgotten Ltd added in a statement.

“Many of these business owners have taken loans and these are now exhausted and Mr Sunak still refuses to hear the voices of those he has ignored and marginalised.”

'Bemused'

But specifically on insolvency, the chancellor used his Spending Review speech to deliver the seemingly positive news that commercial failures are reducing.

“We have taken, and continue to take, extraordinary measures to protect people’s jobs and incomes,” the chancellor began. “And it is clear those measures are making a difference.

“The OBR [Office of Budget Responsibility] now state… that business insolvencies have fallen, compared to last year.”

Insolvency specialist John Bell believes that even if the stats are right, they have a false bottom.

“I was bemused to hear the chancellor point out that…insolvencies have fallen which suggests that the economy is buoyant,” the founder of Clarke Bell told ContractorUK.

“I would like to set both him and the OBR straight – the reason that insolvencies are down is due to the Covid support that has been extended by the chancellor. 

“The furlough scheme, the Bounce Back Loans along with the Coronavirus Business Interruption Loans are all working to keep ‘zombie’ companies alive. These companies will not survive when the support is withdrawn. So financially, the worst is yet to come for the economy.”

'Mortal blow'

Trying to avoid commercial  collapse, umbrella companies have (like limited companies and their representatives), written to Mr Sunak to request financial aid amid the pandemic restrictions continuing.

In particular, umbrellas want the Coronavirus Job Retention Scheme’s small print changed, to allow them to simply charge their usual margin when meeting the costs of furloughing staff.

But Orca Pay Group boss Robert Sharp, who has written about the issue to prime minister Boris Johnson too, says the 2020 Spending Review contains no help whatsoever.

“It has been a mortal blow for [umbrella companies as] employers”, he says. “[And with] no reply to my letters and from having watched the spending review this afternoon, I now don’t expect one.”

“Now it is time for action,” says Neil Carberry, chief executive of the REC, albeit referring to a promise which the chancellor did make in his speech yesterday -- “improving the way the apprenticeship system works for businesses.”

"The chancellor is right that the Apprenticeship Levy needs to work better for businesses, so making it more flexible is a step we have long campaigned for. But we have had promises before.”

'Damp squib'

Mr Carberry continued: “The levy must be broadened so temporary workers can access high-quality, shorter training courses – the kind that are needed now to help people transition into growing industries”.

Hoping that a potentially throwaway line in the chancellor’s speech will offer some ‘good’ to the temporary work sector (SR chapter 6.17 contains further details), is a measure of the Spending Review’s relevance to contractors, suggests compliance expert Crawford Temple.

And especially when the ‘bad’ is already known, and still incoming.

“The government had previously confirmed that there will be no further delay to the implementation of the off-payroll legislation,” Mr Temple, boss at Professional Passport told ContractorUK last night. “In general terms, this spending review holds very little news for contractors or our sector. So, [all in all] a damp squib.”

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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