When is a worker an employee – and when are they not? It’s not a trick question, don’t worry.
Rather, it is one that goes to the heart of UK business practices and the muddled picture that’s now building up just at the time when the country’s commercial competitiveness is in particular spotlight over Brexit.
Why muddled? Well, consider these three in-play scenarios:
- HMRC’s move to make public sector bodies responsible, from April this year, for determining the IR35 status of contractors – that is, whether they can be genuinely classed as independent contractors or should be reclassified as quasi-employees, and taxed differently.
- The Taylor review, published in July and especially focused on lower skilled employment rights in light of the rise of the low pay gig economy. The review makes much of “one-sided flexibility” where employers seek to transfer all risk onto the shoulders of self-employed workers in ways that make people more insecure. What the UK needs to formalise, argues Taylor, is the status of “dependent contractor” that distinguishes some workers from those who are legitimately self-employed.
- The UK’s characterisation, by MPs on all sides, as a modern and flexible economy that gives it the edge on other countries and enables globally competitive, nimble businesses. For now, this is all backed by low corporate taxes and access to Europe’s huge skilled labour pool plus, in many contexts, the cream of global talent.
So the big question for business is whether, or to what extent, the current set-up will change. Not just with Brexit but alongside other potential government and HMRC moves.
In other words, is there a definite tension between the impetus for tax reforms and the trajectory of Brexit on the one hand, and the UK’s overarching commitment to maintaining a flexible, low-taxation backdrop for businesses that delivers true competitiveness?
Earlier this month, research was published by the contractor website Contractor Calculator that suggested some substantial early impacts in the public sector from IT contractors quitting in the wake of public sector bodies now being responsible for administering the IR35 tax rules.
It was only a snapshot among IT workers from a potentially much wider impact, but among those respondents to the site’s survey, four-fifths reported delays on public sector IT projects.
HMRC rejected the findings as not representative of its own analysis, but the question for private business is whether the roll-out of this shift in accountability will be extended to the private sector in the near future.
Why? HMRC’s hope would be to boost the tax take by bringing even more contractors within the scope of the legislation.
Dave Chaplin, CEO of Contractor Calculator, says, given that IR35 has now shifted in how it functions for the public sector, it makes sense for private business to do some due diligence among its contractor base.
“Private sector firms should consider assessing their contractors in relation to IR35, just so they know where they stand. What you want to avoid is being left in the situation where the reforms are rolled out and you suddenly find all your contractors asking for a 25 percent pay rise or even leaving.
“It’s about managing the risks to projects that use contractors. When the IR35 tide comes in, really you want all projects using contractors to be fully secured to avoid drift.”
What’s the logic of all this, though? Why would the private sector have to start applying IR35 judgements on its contractors?
The government would be crazy to leave the two-tier system in place, even if it would also be mad for the government to expand the rules into the private sector.”
“Why wouldn’t it?” says Chaplin. “The government would be crazy to leave the two-tier system in place, even if it would also be mad for the government to expand the rules into the private sector.”
The sensible option, Chaplin argues, would be to repeal the IR35 reforms. “However, repeals rarely happen, and neither the government nor HMRC are in the habit of admitting when they are wrong.
“So I think there are two possibilities. We will see them go full steam ahead and announce a rollout in April 2018. Or government will turn a blind eye to the IR35 reforms for a year while they take stock – and then consider how to roll out a tweaked version in April 2019.
“Either way it spells disaster for the private sector.”
Even if Chaplin’s projections don’t prove accurate, Julie Kermode, CEO of the Freelancer and Contractor Services Associations, which represents contractors, says the wider point is that IR35 reform is a change to tax legislation that has not been properly targeted by the government.
“It has not been proportional and not been fair on the vast majority of genuine self-employed workers or the businesses that have engaged them,” she says. “For businesses, this is the last thing they need, with Brexit already creating uncertainty.
“Broadly speaking, any IR35-related changes result in a less flexible and less agile workforce that is more expensive and more complex to administer. I’m deeply concerned about the potential impact such moves have on the UK’s position in the global marketplace.
Either way it spells disaster for the private sector.”
“Simply put, if the government makes it too difficult or too expensive for businesses to access the workforce and talent they need within the UK, then why should they do business here? The timing of rolling out these new reforms into the private sector is wrong and will put our economy at further unnecessary risk.
“If the government is committed to rolling out IR35 changes into the private sector, at the very least I would hope to see a proper post-implementation review of this year’s IR35 changes before any decisions are made.”
It’s the economy, stupid
The basic argument in relation to IR35 is that the government needs to actively protect the UK’s flexibility for the sake of all sides of its economy. Simon McVicker, director of policy at the Association of Independent Professionals and the Self Employed (IPSE), is another who is explicit about the challenge.
I am certainly worried the government is trying to prevent people from working in a flexible way.”
“I am certainly worried the government is trying to prevent people from working in a flexible way. Recently, it has put the gig economy under intense scrutiny and made much of the concept of false self-employment. Taken together with the public sector IR35 reforms, it’s almost as if the government is intent on making it extremely difficult to be self-employed.”
McVicar adds: “In fact, it’s very easy to reach the conclusion not just that the government doesn’t understand the self-employed, but that it’s actually unsympathetic towards them. That’s not something that will help the UK post-Brexit.”
This article is the first part of a two part series on the UK’s changing economy. Next week, we’ll look further at the dynamics and politics of the unskilled ‘gig’ economy and at the wider picture of UK legislation and competitiveness. Are you worried or untroubled about the flexibility of your business? Let us know.