Budget 2018: IR35 delayed and limited to larger firms


Philip Hammond announced an extension of IR35 to the private sector, apprenticeship levy relief for small firms, and investment in mental health services

IR35 tax rules will be extended from the public sector to include private sector firms, but these changes will be delayed until April 2020 and will “only apply to large and medium-sized businesses", chancellor Philip Hammond announced in his Autumn Budget.

As predicted, Hammond announced changes to the way self-employed status is taxed with the aim of cracking down on people claiming self-employed status to pay lower National Insurance contributions.

“IR35 is designed to ensure fairness so that individuals working side-by-side in similar roles for the same employer pay the same taxes,” said Hammond. He added that, having rolled the rules out for public sector organisations, “widespread non-compliance also exists in private [companies]”, so it is time to apply the same rules to this sector.

Delaying these changes and limiting the scope of the private sector firms affected has drawn mixed responses.

Victoria Roythorne, head of compliance and contractor care at Outsource UK, said the decision “has really only raised more questions”.

“While it’s good that the government has listened to the consultation responses and has given businesses time to prepare for this change, the fact the law will only be applicable to large and medium firms makes little sense. For a start, what size bandings will differentiate a small or medium firm?” she said.

“Hammond said that 'IR35 was designed to ensure fairness', but surely applying complicated legislation to only medium and large-sized businesses doesn’t create a level playing field?”

Roythorne added that the “most important [thing] is compliance”.

“Firms need to get on board with the changes otherwise they risk not only a financial hit but losing out on the best talent too. This legislation definitely does not mean that businesses can’t use contractor resource. It does mean that they must be aware of what the changes mean, so that when they do tap into the UK’s talented flexible worker pool all parties get the best, most compliant outcome,” she said.

Mike Hibbs, partner and head of employment at law firm Shakespeare Martineau, said that the changes will put more pressure on firms during employment checks.

“Following the rollout of IR35 to the private sector businesses will have to be far more stringent with their employment checks. Incorrectly identifying people as an employee, a worker or self-employed could have serious financial implications for organisations going forward. Ensuring that employment contracts accurately reflect the circumstances of an employee’s engagement will also be essential,” he explained.

The chancellor also addressed current concerns with the apprenticeship levy, announcing that while it is delivering “300 million quality apprenticeships” it’s “paid for by the employer and so has to work for the employer”. In response he pledged to halve the contribution of small companies to the apprenticeship levy, from 10% to 5%, which would amount to an additional £695 million to support small businesses hiring apprentices, he stated.

Ben Rowland, co-founder and key account director of Arch Apprentices, welcomed this support for smaller firms.

“It’s brilliant that the government is taking steps to reinforce apprenticeships as the way to boost skills and productivity, and we hope employers will increasingly recognise them as an opportunity to accelerate their business performance and bring new life to their teams,” he said.

“The UK is facing major issues surrounding productivity and a lack of skilled workers. We see the government’s belief in apprenticeships as the solution to these problems. Through these changes we will train a workforce fit for any future.

The CIPD, however, called for greater ambition from the government on skills. "It’s promising to see that the government has halved the apprenticeship levy contribution for smaller businesses but this is unlikely to greatly boost the number of apprenticeships offered by small firms, many of which lack the capacity to take on apprentices," commented Ian Brinkley, acting chief economist for the CIPD.

"The levy is still far too rigid to work in practice for many employers. We need a more flexible training levy that can help organisations fulfil a number of training and development needs rather than shoe-horning funds and efforts into the apprenticeships model alone. It’s vital that the government continues to review the operation of the levy to ensure it delivers the right results for all businesses and individuals, and that it can meaningfully help address the UK’s productivity challenge."

Mental health was another focus in the Budget, with Hammond pledging to invest in a “mental health crisis service” that will include children and young people crisis teams in every part of the country, mental health ambulances and a 24-hour mental health hotline so that “people suffering from a crisis, young and old, can get the help they need”.

Peninsula employment law director Alan Price said this will be welcome news to businesses as employee mental health continues to rise up the agenda for HR. “The announcement of increased spending for mental healthcare services is a positive sign for employers who are becoming increasingly aware of the importance of positive management of staff with mental ill health," he said.

"Following World Mental Health Day earlier this month, which aims to increase awareness, employers are likely to be examining their internal practices to ensure they are best placed to provide employees with workplace support. A key part of this is making employees aware of appropriate external services and the newly-announced 24-hour mental health crisis hotline will be a positive tool for employers and employees."

The chancellor also announced that the personal allowance for income tax will be increased from £11,850 to £12,500 from April 2019, while the threshold at which you pay a higher rate of income tax will rise from £46,350 to £50,000. This is a year earlier than his party's manifesto commitment, he pointed out.

He also set out a number of tax reliefs for businesses. The business rates bill for companies with a rateable value of £51,000 or less will be reduced by a third over the next two years, and there will be a £900 million business rates relief for small businesses as well as £650 million to help boost the nation’s struggling high streets.

“The promise in business rates reduction will allow small employers to consider their financial budgets ahead of the expected increases to the National Minimum Wage and National Living Wage in April 2019. At the same time employer minimum contributions for members of staff auto-enrolled into workplace pensions will be increasing from 2% to 3%. This makes April a costly time of year for employers, so they can use this time to plan their accounts and ensure they have adequate funds in place,” commented Price.

Others said these reliefs might buy retailers and their employees some time.

Diana Campbell, operations director at jobs platform Zoek, said: “The decision to cut business rates for half a million small business retailers is a good move. For some these reductions will mean the difference between keeping staff employed or needing to make redundancies, so we are pleased the government is looking at measures to tackle the decline.”

However, she said more work is needed to help reskill those in at-risk industries. “We are seeing huge numbers of vacancies come through, however with specific skillsets required it can be difficult for some to cross-skill or understand how their previous experience can be transferrable. More investment in training these who have been hit hardest by the high street decline would be welcomed,” she added.

A recurrent theme of the Budget was that the “era of austerity is finally coming to an end”. Hammond said that it is a “‘Budget for hard-working families”, for the “strivers, the grafters and the carers who are the backbone of our community and economy”, citing 3.3 million more people in jobs, higher employment and lower unemployment in every region of the UK, and wages growing at the fastest rate in almost a decade.

Sustained real wage growth is forecast to rise in each of the next five years and 800,000 more jobs are forecast by 2023, he said, adding that the “ultimate objective [is to] end low pay in the UK and also protect employment for lower-paid workers”.

On tackling the UK’s productivity crisis, Hammond said the country needs to invest in universities, research institutes, infrastructure and skills, and “manage change not hide from it”.

“This is the nation of the industrial revolution,” he said, calling on the need to “prepare the nation for the technological changes ahead”. This included an additional £1.6 billion channelled into the modern industrial strategy, as well as £150 million in fellowships to “attract the best talent from around the world”. The National Productivity Investment Fund will also be expanded to £38 billion by 2023/24.

Encouraging entrepreneurs is key, Hammond added, announcing the extension of a new enterprise allowance providing mentoring and support for benefits claimants to help them “get ideas off the ground”. “I don’t believe we can have sustainable public services unless we have a dynamic economy and encouraging entrepreneurs must be at the heart,” Hammond said, explaining the decision to retain entrepreneur relief but increasing the minimum qualifying period from 12 months to two years.

Other announcements included a new digital services tax on big technology companies, which will be introduced from April 2020.