No clarity on IR35 private sector rollout

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Public sector IR35 legislation has had a negative impact for many. Would the same be true if extended to the private sector?

When chancellor Philip Hammond delivered the Autumn Budget in November what was most surprising was what was missing rather than what he included. Many members of the HR community fully expected the chancellor to introduce a timeline for the private sector rollout of IR35, which was introduced in the public sector in April 2017. Instead it got a passing mention in the red book, which merely reiterated the government’s intention to at some point consult on the matter.

So what’s the current state of play in relation to the wider rollout of IR35? Is it still likely to go ahead – and if so when? And given the turmoil it’s created in the public sector are there better alternatives?

The government introduced IR35 to the public sector last April after initially touting the idea in the March 2016 budget. The legislation was created to stop individuals navigating UK tax laws by setting up their own intermediary operation to supply public sector organisations and then claiming they were self-employed rather than employed. The upshot of the new IR35 legislation is that any public sector organisation that uses contractors is ultimately responsible for establishing if those contractors are employees of an intermediary or self-employed.

“It was a huge change,” says Lee Hamilton, partner at accountancy firm Blick Rothenberg. “Take the example of the NHS. If it used 30 consultants via personal service companies then prior to the introduction of IR35 it [the NHS] didn’t care if they were employed or self-employed for tax purposes because in effect that was down to the personal service company to determine. However, under the new legislation it’s now the public sector’s responsibility. And what the government has effectively said is ‘now we’ve done it in the public sector let’s roll out those changes to the private sector’.”

Hence it was widely expected that in the Autumn Budget the chancellor would lay out a timeline for this.

The fact that he didn’t was welcomed by the likes of Julia Kermode, chief executive of the Freelancer & Contractor Services Association. “On Budget day we were pleased to hear that the government was not simply bulldozing ahead with legislation that would have a negative impact on the flexible workforce and the UK economy as a whole, and pleased that a consultation period will now take place,” says Kermode.

“The government must recognise employment status is an important and complex issue, and we look forward to helping it explore options for longer-term reform, making employment status tests for both employment rights and tax clearer. This is positive providing that it will be a genuine and meaningful consultation, and that stakeholders will be listened to.”

However, many recruitment experts feel that the consultation process prior to the introduction of IR35 in the public sector wasn’t comprehensive enough and worry that the new rules will be similarly rushed through in the private sector.

“Between the announcement of what IR35 meant in detail and the implementation date by which we all had to abide to be compliant, they gave us about three weeks,” says Peter Holliday, managing director at Sopra Steria Recruitment. “Although HMRC consulted [on introducing IR35 to the public sector], from what we could see there was very little consultation with the actual end users – the people who use the contractors.”

As a result: “The public sector IR35 reforms were a mess, are still a mess, and there are lawyers lining up to potentially launch a judicial review,” says Dave Chaplin, CEO and founder of ContractorCalculator, which provides free expert advice and information to freelancers and contractors.

Hamilton says he has heard anecdotal evidence of individuals turning down public sector work because of the introduction of IR35, as has Holliday.

“We heard that many smaller recruitment companies decided to pull out of delivering contractors to the public sector and their reason for doing that is there is a lot of cost involved in changing your business model to be compliant and a lot of work involved in trying to explain to contractors why their take home pay would be lower,” says Holliday. “Under IR35 the recruitment company becomes the tax deductor – we physically have to pay HMRC on behalf of the worker. That’s a fundamental change and some smaller recruitment companies see it as a massive overhead for no particular return.”

The fallout witnessed in the public sector following the launch of IR35 is why people like Chaplin believe it shouldn’t be introduced in the private sector.

“In its current form rolling out the reforms to the private sector will be like pouring glue on the flexible economy,” says Chaplin. “The cost of hiring the contractors will rise as the additional tax burdens will be borne by hirers who discover they need to pay higher fees. Business will have less agility by not being able to access UK freelancers in any easy way. This red tape burden associated with IR35 would be very damaging for firms that rely on easy access to freelancers.”

So what are the possible alternatives to IR35? The Association of Recruitment Consultancies (ARC) believes there are a number of different options the government could pursue. Its chairman, Adrian Marlowe, says that ARC is currently pressing the government to consider the role of business tax reliefs instead.

“HMRC sees this issue as tax avoidance, but we think the big picture is relevant – what is meant by a business,” says Marlowe. “The [select] committee’s suggestion is a person in business is one who is neither an employee nor a worker. This requires job-by-job assessment. We believe this is fundamentally the wrong approach. A business should be carefully defined and tax reliefs follow, leading to certainty for everyone. This demands a much wider debate which, if we could get it going, would undoubtedly affect contractors and IR35.”

But efforts from the likes of ARC could ultimately fall on deaf ears; many HR and recruitment experts think that the government is hellbent on pushing ahead with the wider rollout of IR35. It’s just a case of when and not if, believes Seb Maley, CEO at Qdos Contractor.

“The rumoured April 2018 implementation now seems very unlikely. However, should the government be intent on extending IR35 changes, a 2019 implementation is possible,” he says.

Despite creating complexity in the public sector he believes that provided the private sector takes the appropriate steps now further reforms could be managed.

“Engagers must learn from mistakes made in the public sector and take the initiative by preparing sooner rather than later,” warns Maley.

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