· 3 min read · Features

Will IR35 legislation put firms off using freelancers?


Upcoming government legislation risks making use of freelancers a far more complex issue

"I am not a a number, I am a free man." So said Patrick McGoohan in 1967 in his role as The Prisoner when he arrived at The Village as No. 6. He went on to say: “I will not make any deals with you. I’ve resigned! I will not be pushed, filed, stamped, indexed, briefed, debriefed or numbered! My life is my own.”

Almost 50 years on, other “free” men have been floored by a different type of number - IR35. Originally a numbered news release announced by the government in the 1999 Budget, IR35 came into force in the UK in April 2000. The concerns and controversy surrounding the Intermediaries Legislation have established it as a term in its own right and it is still proving a hotly debated topic as the government is considering giving end-hirers a much more active role.

While a recent NAPF report revealed that only 11% of FTSE companies record the number of temporary staff they take on, this looks set to change, as under the new proposals hirers may end up determining the employment status of the freelancers and contractors they engage with. This may sound simple, but employment status is anything but black and white and a whole profession of experts don’t always agree, so what hope is there for end hirers, the clients, the HR and procurement departments within businesses?

July’s discussion document issued by HMRC around IR35 has triggered yet more unease for the contracting community and those they engage with. HMRC is intent on “making IR35 more effective” which translates to mean collecting more tax for the chancellor and levelling the field between direct employees and their workers. But don’t get me wrong – FCSA does not condone any malpractice. Anything that helps police the industry more effectively and rid the sector of any abusers is a good thing. However, tinkering with something that is basically flawed and ineffective will not fix it and unfortunately HMRC cannot provide the resources to properly enforce the legislation. However, asking taxpayers who are confused by definitions to self-certify a complicated tax status is not the answer.

HMRC believes that too many freelancers are not determining themselves as inside IR35 and the Exchequer is missing out on tax but shifting the onus onto end-hirers is a recipe for further disaster. It will require all companies, regardless of size, to understand complex legislation and be liable for getting it wrong. This is surely an unfair burden on already over-stretched HR departments, particularly given the magnitude of potential financial penalty.

If hirers have responsibility for employment status, some firms may require a freelancer to be employed on a short-term contract, which then increases headcount unnecessarily as well as bringing with that the HR risks associated with such a move. A further alternative is that hirers will require PAYE to be applied, but without actually employing them, thus reducing the income to the freelancer who is then taxed as an employee but without any of the statutory rights or benefits of employment. This effectively creates false employment, rather than addressing so- called false self-employment. And, of course, freelancers may then look to increase their assignment rates to take account of the tax being paid so it will be UK plc that will be paying for HMRC’s shortcomings in policing the current legislation.

At FCSA we are very worried that hirers will simply not engage freelancers and contractors at all which will defeat the whole purpose of a flexible freelance workforce that enables businesses to be agile. In fact, this very same workforce has been widely credited with enabling the UK’s economic recovery so far, so it is unthinkable that government might be prepared to jeopardise this with an ill-thought through move.

To help avoid disaster we are encouraging all businesses, large and small, to respond to HMRC’s consultation document arguing against these proposals.

It’s never been so important for us to all work together in the best interests of business and the flexible workforce that supports the UK’s continued growth and prosperity.

Julia Kermode is chief executive of the Freelancer and Contractor Services Association (FCSA), the independent trade body that is committed to setting standards for umbrella employers and contractor accountancy providers.