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Off-payroll rules in 2019: A year to prepare for the inevitable

15th Jan 2019
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Dave Chaplin dissects the government’s current plans to roll its off-payroll rules to the private sector and outlines what contractors and those hiring them can do to prepare.

When Benjamin Franklin, paraphrasing Daniel Defoe, wrote “In this world nothing can be said to be certain, except death and taxes," he had no idea of the inevitable repercussions that will be felt when the government extends its off-payroll rules into the private sector.

As the government plans to drag the whole contracting sector into the sorry saga of IR35 by 6 April 2020, this year will be crucial for the industry. The forecast is bleak. The threat of extensive damage can be predicted reliably, based on the results that have already been observed in the public sector. However, there is time to mitigate the effects by assessing the risks and taking appropriate preventive measures.

Storm clouds gathering

The risk for both contractors and firms is large and the knock-on effects will be felt widely. Firms still seem to be blissfully unaware that they are going to be saddled with an additional 12% cost in extra taxation for hiring contingent workers. This is probably because HMRC and the Treasury have refused to shine a light on this damaging fact, instead choosing to scapegoat contractors as being tax avoiders. The reality is, of the extra tax due, circa 84% of it is payable by the firm hiring the contractor.

From an analysis of the public sector experience, it is likely that those responsible for hiring contractors will over-react, try to force contractors to work within IR35 rules, treat them as full-time employers for tax purposes, try to pass their new tax bills onto them, and not provide all the rights and benefits that go along with full-employment status.

It would be naive for any firm to expect this tactic to work. Consider for starters the impact of telling a worker they are a disguised employee, not giving them rights, and then having that challenged at an employment tribunal – what better evidence for a contractor than a hirer’s IR35 assessment deeming them to be an employee?

For fear of breaking the rules and having to pay penalties and back-dated tax, those who hire contractors may decide to only take them on as fixed-term employees, which will be detrimental to both parties.

The employer will have the added expense of providing National Insurance, sick pay, holiday pay and all the other associated obligations. In addition, as workflow fluctuates, there will be times when there is a surplus of staff and other times when there is a shortage. Employers may decide to take on less qualified freelancers to compensate for the extra cost instead when extra help is needed.

Damage limitation measures

There is still time to influence the Finance Act that will be published to coincide with the Autumn Statement in November but contractors and other interested parties will have to act soon. A consultation document will be out in February 2019 followed by draft legislation in the summer.

So now is the time to make politicians aware of the dangers inherent in the legislation. We have been lobbying persistently on behalf of contractors and whilst we are trying to get the extension into the private sector cancelled, we do have a plan B of trying to get it amended, prevent its worst consequences and ensure fairness for contractors.

If the worst comes to the worst and the legislation goes through without amendment, then it will be well worth the effort to ensure that contractors are fully IR35 compliant. Maintaining a flexible workforce and avoiding an inappropriate level of taxation is vital to employers and employees, their industries and the wider public.

If you are going to take on the government, your best bet is to be well prepared. As Benjamin Franklin said: “An investment in knowledge pays the best interest.”


Replies (1)

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By cereus77
16th Jan 2019 13:40

Nice article; thank you.

Am I correct in believing that if the off payroll rules are applied to private sector this will effectively mean that on a contract where a contractor is assessed as falling within IR35 by their client: (a) the contractor will be taxed as an employee and that tax will be withheld by the client and so (b) the contractor will be unable to claim any business expenses as tax deductible as they will already have deducted tax on gross?

It is this second aspect which effectively destroys the contracting industry in the UK I think. Few will be able to afford to take a short term contract working in a different location if they are unable to recoup their travelling costs and the costs of living in a hotel or apartment during this time.

The overwhelming ignorance of a government/tax authority that push ahead with this approach after already imposing a dividend tax on those forced to use limited companies by their previous intermediaries legislation which more than “levels the playing field” with employees in Philip Hammond’s disingenuous language staggers me.

Please tell me that I am wrong about the expenses!

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