Mixed messages: Is the UK’s flexible economy being threatened?

Mixed messages
iStock_Marrio31_AW
Share this content
Tags

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?

Understanding IR35

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.

Due diligence

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.”

Badly targeted

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.

About Christian Annesley

Replies

Please login or register to join the discussion.

avatar
13th Sep 2017 16:02

IR35 is a good example of how the UK is just as bad (if not worse) as the EU for wacky ideas. Working patterns have changed considerably over the last twenty years and will continue to change, flexibility being the key word. By using 'master servant' type definitions, it is clear that the tax system is not keeping up with modern working patterns.

If we take a step back, the tax system should be designed to collect tax from businesses and individuals. It should not seek to insist that businesses are run in such a way to suit HMRC (MTD take note). I would have thought that the new dividend tax, especially now that the limit is only £2,000, would have largely removed the need for IR35. Although, I still think 12% would have been a better rate and should only have applied to close companies and umbrella companies trying not to be close companies.

The tax system should fit around the way businesses operate not vice versa!

Thanks (3)
avatar
14th Sep 2017 10:44

A great article which highlights exactly the problems employment status is facing.
Vaughan is right when he says that the tax system should be built around how business works.
My own feeling is that we should get rid of the PAYE system by merging tax and NIC. Everyone being self-employed but with benefits (obviously unions and other bodies would be consulted as to how all work givers could operate without the need for legislation). This would give flexibility and uniformity. A bit like the American system with additions. Tax could still be collected on a monthly basis, even corporations.

Thanks (1)
avatar
14th Sep 2017 11:49

Whilst i have sympathy with John Jenkins idea I dont believe it is a fix. If all income tax and NI are merged then those who are retired suffer a large tax increase. If not we have a another two tiered system.

Vaughan is absolutely right in getting the tax system to work the right way.

Sadly too many who work for HMRc and others have never had a job out side the government and so ideas are not going be great.

For me we should dump IR35 and introduce a service company additional corporation tax. Directors can elect not to be taxed under this new regime but if they are found to have elected wrongly then HMRC should have the right to go back and collect the tax, interest and penalties from the directors personally and go back 20 years if necessary.

Thanks (0)
avatar
to pauljohnston
14th Sep 2017 12:16

I should have added that IR35 and the tax on dividends be done away with.
The retired would simply have an increased tax free pay to compensate any increase in tax. Following on from that if you got rid of free pay and allowed basic personal expenses (as well as business ones) to come off income before it was taxed then you wouldn't need "tax credits". Obviously you would have to prove the expenses were "kosha".
I've started to get into the American system and there is a lot I like. With a bit of tweeking it would be ideal.

Thanks (0)
avatar
15th Sep 2017 09:54

“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.”

This is all a little over the top, workers rights yes, the above.... no way.

Thanks (0)
avatar
15th Sep 2017 10:08

It is my view that the Government want to cut down on the self-employed and have all small business on a PAYE system. If they don't want stagnation then they will have to do a U turn. It is sad to see Government want to destroy our work force just so they don't have to put basic rate tax up.
Surely what has happened with MTD and the outcry from that should tell them they are doing something that is fundamentally wrong.

Thanks (0)
avatar
By tedbuck
15th Sep 2017 11:41

As far as I can see neither HMRC nor the Government have the slightest idea how business works and frankly I don't think they even care - to them it is just a source of money that they can then spend on their pet projects. HS2 MTD and the like. All way over budget and all doomed to end up as white elephants. We have now got so many boxes to tick that we don't have time to work on productive things so why is HMG surprised that productivity is low? Everywhere one turns there is now an obstacle to getting things done. All government departments don't want to deal with people only computers so there must be little expertise left in them (perhaps why they cannot even understand the application of their own laws cf the tax return fiasco.).
And on top of that we have FRS102 - nice to know the the profession has joined into the party with gusto.
How many people in HMRC are there who can actually understand the tax laws they are meant to enforce? They certainly don't seem very good with the multi national Companies but they are good at beating Mr Smith over the head when he doesn't get his VAT return correct. Perhaps there is a moral there?

Thanks (1)