A resounding thumbs down for proposed IR35 changes?

The deadline for responding to HMRC’s consultation document on extending the off-payroll rules to the private sector has expired. We are all now eagerly awaiting their report on the responses given and the subsequent details of the chosen approach.

AAB have been monitoring the changes closely.

In April 2017, IR35 ‘off-payroll’ rules were applied to contractors working in the public sector. This effectively means that clients, not contractors themselves, are responsible for operating the IR35 rules.

Despite widespread concern about the chaotic implementation and the inaccuracy of the employment status test tool (with a 14-month investigation by Contractor Calculator showing it to be wrong in almost half of all cases[JS1] ), HMRC proceeded to publish a consultation document to assess the viability of expanding the legislation to the entire private sector. The deadline for responses closed on Friday 10th August 2018.

The Treasury claims that the cost of ‘non-compliance’ with IR35 legislation by individuals in the private sector could reach £1.2bn by 2022/23 as it is estimated that only 10% of contractors who should comply with the existing legislation actually do so.

If the rules are applied to the private sector, this will have a significant impact on the contracting world. There are major concerns that HMRC pushed the consultation through earlier than anticipated with a view to new legislation coming in to play as early as April 2019.

Even though, in theory, most contractors can demonstrate that their contracts are ‘outside IR35’, many public sector clients have issued blanket ‘inside IR35’ determinations to all of their workers. Others have been forced to use umbrella companies. This pattern will more than likely repeat itself in the private sector.

These, and many other fundamental issues have been considered by the many different sectors and professions that these changes will impact, and we have summarised some of the responses below.

“Don’t do it!”

The Association of Independent Professionals and the Self-employed (IPSE) says “don’t do it, and definitely don’t do it anytime soon.”

IPSE follows that with several recommendations, its top one being that HMRC should ‘abandon’ extending public sector reform completely.

If the tax authority does forge ahead, IPSE warns it should explicitly rule out implementing new rules in 2019. This is so it can solve ‘technical problems’ from the public sector rollout.

IPSE’s other recommendations include a call for agreement that the Check Employment Status for Tax (CEST) tool actually works, and that SMEs and micro-businesses are exempt from new rules.

Recruiters warn against rushed policy

In its official response to the consultation, The Recruitment & Employment Confederation (REC) says that any extension of the existing public sector rules should not be rushed. Implementation in April 2019 “would create upheaval in the private sector and risks damaging the flexibility of the labour market.”

The industry body suggests that the Government should complete a “comprehensive post-implementation review of the public sector changes”, as well as an impact assessment on the private sector.

Likewise, the Associate of Professional Staffing Companies (APSCo) recently “stressed the potential implications of implementing changes within an unrealistically short timeframe” during a meeting with Financial Secretary to the Treasury Mel Stride.

“Re-cast” Employers’ NI as a levy on business costs

The Chartered Institute of Taxation (CIOT) makes the broad (and important) point that businesses prefer to hire Personal Service Companies (PSCs) over staff, as this insulates them from paying employers’ National Insurance Contributions (NICs) and also potential employment rights. “We think the IR35 issue, the taxation of the employed vs self-employed and labour law should all be viewed through the same lens and considered together.”

As a result, if employers’ NICs were “re-cast as a levy on operational business costs rather than being focused very narrowly on wages then the tax motivation for business to encourage PSCs would arguably be lessened”, as the cost of hiring an employee or a contractor would be the same.

The CIOT view is also in line with the Taylor review on working practices.

Improve existing IR35 regime without new legislation

Leading insurer, Qdos, says that the public sector reform “has had a significant, detrimental impact on thousands of workers who were genuinely operating outside IR35.”

It points to the forced use of umbrella companies by public sector bodies, and well-documented failings of the CEST tool.

Qdos suggest ways in which compliance can be improved without the need for new legislation, by making the investigation process more efficient, using existing information more effectively, and by HMRC dropping cases at an earlier stage when they have little chance of winning.

An alternative? Existing IR35 rules with more stringent reporting

The Freelancer & Contractor Services Association (FCSA), which represents some of the UK’s leading contractor service providers, says that Government’s £1.2bn non-compliance claim, and others are “overinflated”, and that “the 2017 reforms have been a shambles and the Government cannot realistically countenance any roll out to the private sector.”

The organisation has put forward an interesting alternative – The Enhanced Reporting and Enforcement solution, which “will allow Personal Service Companies (PSCs) to retain responsibility for their IR35 status, as they currently do, albeit with an obligation of reasonable care.”

Under this alternative scheme, all labour supply chains will be secured, with information shared throughout the chain, and reported quarterly to HMRC.

Game Changer?

No one’s mind shift on IR35 seems to have been as substantial as that of the Chancellor!

Two days after HMRC’s consultation closed for responses, Contractor Calculator dug out comments made by Philip Hammond in 2001.

Back then, the now Chancellor said that “one reason why the Government’s IR35 initiative has been so damaging and destructive is the fact that it has hit at the most flexible part of the economy.”

Contractor Calculator CEO Dave Chaplin is encouraging contractors to write to their MPs, to get them to ask why the Chancellor has changed his mind.

 

So what’s next? One thing is certain, the majority of respondents are in agreement that HMRC should at least delay rollout of private sector reform until they can assess its full impact on the public sector.

And with HMRC’s lead option coming in for overwhelming criticism, how will they respond now?

As always, we will keep you updated.