HMRC flags new IR35 regime for private sector

IR35 juggernaut rolling towards private sector firms
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The Autumn Budget confirmed rumours that the government would start a consultation exercise about rolling out the IR35 tax rules to the private sector.

Paragraph 3.7 of the Budget report “Off-payroll working in the private sector” explained that since the rules were extended to the public sector in April, “Early indications are that public sector compliance is increasing as a result.”

With this apparent success, the tax department is thinking of extending the regime to the private sector, “to ensure individuals who effectively work as employees are taxed as employees even if they choose to structure their work through a company”.

While the consultation has been announced, there was no sign of a policy paper on Budget day.

As AccountingWEB member eapoffice responded last week to an article predicting the move from ContactorCalculator.co.uk's Dave Chaplin, the Conservatives made noises about abolishing IR35 when they were in opposition, but now appear to be falling in line with HMRC’s line of thinking.

The consultation is already fuelling controversy in the contracting community. The government announcement appeared to acknowledge these concerns and pointed to a softly, softly approach drawing on “experience of the public sector reforms” and external research. This information – and presumably the consultation document itself – are due to be published in early 2018.

Flagging up the Budget announcement for its members ContractorCalculator.co.uk explained that the public sector IR35 rules introduced in April shifted responsibility for evaluating the IR35 status of each contract to the organisation engaging the contractor, which would then be responsible for deducting PAYE.

And if recruitment agencies supplied contractors caught by IR35 they would be responsible for deducting tax. Shifting the burden of liability up the supply chain “creates a huge incentive for clients and agencies to assess contractors as caught by IR35, which contractors are well aware of. Extending these rules could mean many contractors will struggle to ever secure a fair IR35 assessment,” the site warned.

Andy Chamberlain, the IR35 policy spokesman at the independent contractors’ association IPSE also voiced concern. “We think it’ll be a complete disaster. It would put a huge restriction on the UK’s flexible labour market, which is one of our best competitive advantages,” he said.

“As we exit the EU, it’s more important than ever that UK retains its reputation as an easy place to do business.”

Commenting on the issue last week, AccountingWEB member Nigel Harris said, “My impression is that public sector employers are applying the new rules on a blanket basis, irrespective of the merits of the contractor's contract and working practices, etc. If HMRC/Gov pressurises private sector employers to do the same, then the contracting sector is sunk.”

Both contractor groups feared that the government would extend IR35 to the private sector by next April, but the Budget announcement points to a more considered approach.

“We’re pleased to see the government has listened and is promising a ‘careful consultation’ and to look at impact on the public sector. We think the government needs to stand back and take a wide aspect view of changing labour market, and look at the employed-self employed boundary to clarify it both for employment status and tax status,” said Chamberlain.

As an aside, he held a faint hope that the research on the impact of IR35 on public sector projects might convince the government to backtrack.

Dave Chaplin at ContractorCalculator.co.uk had a word of warning for accountants. “If you have got lots of contractors who are likely to be caught then you need to start worrying, and anyone on 12-month contracts that start after April 2018 need to consider IR35 compliance.”

About John Stokdyk

John Stokdyk is the global editor of AccountingWEB UK and AccountingWEB.com.

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22nd Nov 2017 16:01

The short-term sense of relief among contractor specialists seems to be unanimous. This just in from Julia Kermode at the Freelance & Specialist Contractors' Association (FCSA): “Surprisingly the Chancellor’s speech made no mention of IR35 or off-payroll reforms being extended to the private sector, however it was included in the red book where he commits to a 'careful consultation' on how to tackle non-compliance in the private sector. This is fantastic news and shows that the Government has finally listened to FCSA's many concerns regarding the public sector changes already in place, their devastating impact on the public sector and increase in non-compliant schemes that have resulted. It is very positive that the Government has not simply bulldozed ahead with legislation that would have a negative impact on the flexible workforce and the UK economy as a whole.

“We are pleased that the Government recognises that employment status is an important and complex issue, and will be exploring options for longer-term reform making employment status tests for both employment rights and tax clearer. This is positive providing that it will be a genuine and meaningful consultation, and that stakeholders will be listened to.”

The tenor of these comments seems to be that they're looking forward to the chance to put the government straight. Given the impact the rules will have on small business engagers, it may be that businesses without a vested interest will have more influence. As Dave Chaplin put it, “If they have to increase costs 13.8% [rate of employer's NIC], that might ignite some of the business lobbies to fight back.”

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22nd Nov 2017 17:10

I wish that I was as optimistic as Julia Kermode that HMRC have actually listened to FCSA!

The red book comment about a 'careful consultation' sounds to me like a distant bulldozer starting up in the yard, and the 'devastating impact on the public sector' turning into, "a huge success in closing a tax loophole which levels the playing field for workers in the UK".

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23rd Nov 2017 11:33

The employment status indicator on HMRC website is key to this and it seems to be completely useless with a strong bias. A good indicator would make a big difference to the UK economy. Why don't the contractor bodies publish their own status indicators?

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23rd Nov 2017 12:00

I don't agree with the assumption that end clients will suddenly wish to convert contractors to employees.

The rules are actually that the service company will suffer tax deduction but does that then imply that the director of that company is then entitled to holiday pay etc?

Assuming it doesn't then you have a position where the end client may decide they want the best of both worlds e.g. the flexibility of using a third party contractor and peace of mind that, tax-wise, they are doing the right thing as, after all, if they are engaging for a shorter duration contract then they are unlikely to want the commitment to a new employee

The whole mutuality of obligation kicks in here too - the end client may have no responsibility, or intention, to give more work and that's where the balance starts to look uneasy.

So then you'd find a chunk of contractors (who are working long term for one end client and therefore you can say "fair enough") do switch to PAYE but that others retain independence, potentially suffer larger tax deductions on some contracts, but then as it settles undoubtedly argue better rates with the end client as the rules of supply and demand kick in.......

Or they "genuinely" just change the way they work either way we all know that working practices will change for such contracts.

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23rd Nov 2017 14:24

The Treasury added a 10% stealth tax to public sector bodies - secondary NI contributions above the threshold - and assumed contractors would take the hit when it was passed on to them via renegotiated contracts. It is not clear to me who has actually ended up paying this additional levy. The path of least resistance, adopted by the public sector- everyone is in - will make some private sector businesses less competitive if they go down that route while competitors are less willing to be rolled over.

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By lme
to Eavestile
04th Dec 2017 16:45

Doesn't it actually amount to closer to 26% when you tae account of the employee NICs and the costs of implementation? I find it hard to square the uneven playing field with HMRC's purpose of paying for public services - this seems to be paying to deviate them. Chaos in the public sector and private sector getting a "softly softly" consultation, ages afterwards.

I'd welcome views as this seems terribly unfair to me.

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23rd Nov 2017 15:06

I think the last post makes an excellent point. The main contractor sector in my client base is in the nuclear sector. About 20% of my clients were browbeaten into switching to PAYE roles, which like for like adds roughly 45% on to the cost to the ulimate employer. Even though the rates were about 10% to 15% less, the "public sector" employers took the hit to the tune of around 30%.

However, the employers of the other 80% of my client base refused to be browbeaten, so for them things are just carrying on as they were in 2016-17. This gives them a significant competitve advantage over their rivals who caved in, and they have been noticeably more successful in winning business as a result.

So if you are a private sector hirer reading this thread and worrying about IR35, grow some BOLS!! You will have a significant competitive advantage compared to rivals who cave in to the HMRC bully boy tactics.

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24th Nov 2017 08:07

The original IR35 was good news for the "employers" as it shifted risk. As long as they could bully the "staff" to use a company they did not need to assess anything it was down to the individual to assess their own status. They instantly got rid of the decision do I employ or are they self employed and they lost the risk of HMRC turning up on a PAYE visit demanding back Tax/NI/Penalties.
The public sector will roll over as although they pay the extra NI it goes into government coffers and back to them. The private sector should fight harder but it will depend on them taking a risk with HMRC as sadly there is little certainty.
If we had clearer definitions of status that we could all rely on it would be easier and roles/engagements could be assessed properly.
The main issue is lack of certainty with contracts given out that appear to comply but bear no resemblance to the way things happen on the ground. At the moment the employers don't care as they don't take the risk and I have had contractors who get treated like staff and sadly ones who just behave like staff and so however good the contract they will fail if scrutinised.
We need a balance. It would be wrong that it's so broken that any staff can set up a company and work through it. However it's also wrong that many hardworking project based businesses can't be self employed.
Of course if something more radical was done such as the scrapping of NI (so employees paid more tax and employers paid either more income or corporate tax on profits) employer's NI would go and much of this muddle would go away. It won't happen as that would put headline rates if income tax at an embarrassing level for government. Why do we put up with being taxed to employ people anyway?
Ultimately it will be an unsatisfactory fudge as govt never see the big picture, have no courage for real change and only see as far as the next election and not the long term (unless it's putting things off).

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24th Nov 2017 15:22

It pays to carefully examine the justification put forward by HMRC et al for widening the scope of IR35. The public sector changes are hailed a success for "increasing compliance". There is no balancing analysis of how that more compliant position has led to a shortage of NHS staff, TfL projects being delayed and abandoned, HMRC projects going over budget and time, etc., etc.

In short the "success" of IR35 in the public sector has led to fewer projects being finished at higher cost. Who pays that cost? In the short term it's taxpayers. In the long term it's taxpayers. How can a success be claimed when public services cost more for less output?

The private sector was bracing itself and seems to have a short term reprieve. The private companies have many more reasons for not wanting permanent employees or unexpected tax bills if (eventually) HMRC can be bothered to audit. Whilst it is to be hoped that we will not see a return of mass marketed "tax dodging" schemes of the past, a contractor caught between a company who want flexibility and an inflexible HMRC who just want the money, is going to be in a difficult place.

HMRC can help here. How about a real time tool that is reliable and consistent (i.e. not the current offering) and which employer/contractor can share and which would be the final word. Surely some of the funds collected from "increased compliance" could and should be spent on this?

One of the problems here is that HMRC has entirely lost the trust of the contracting community. They have seen the imposition of law after law and increasing complexity. Look at the Budget this week. Yet more tinkering and the promise of not only retrospection to 1999 but deliberate double taxation. Is it any wonder that HMRC is facing a population that feels itself to have been selected for poor treatment, just for doing what their clients want.

My own feeling is that the contracting bodies owe it to their members to call for a deep and sensible examination of the contractor market, public and private; it's correlation with the gig economy; and how a sensible tax policy that seeks to boost the economy of the UK rather than be blindly and obstinately collect money to the long term detriment of all, can be achieved.

There are perhaps close on 2m contractors in the UK. Most are in the medical profession and are not consultants, but nurses. Some are in engineering. Some in high tech industries. Some in digital industries. Am I mistaken in thinking that there were all part of the Budget speech with a theme of "the UK is at the forefront here and we need to invest to stay there"?

It appears that HMRC has not had that memo and instead have decided, (under whose policy?), that they can deny the Chancellor and refute the will of Parliament.

As an ex HMRC employee myself, it saddens me to say it, but in this area, HMRC is not fit for purpose.

Left to their own devices, they will cause harm to this sector of the economy that we may never recover from.

This needs a long term strategy and not a short term delay.

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27th Nov 2017 10:56

Partly responsible for this mess is the concentration by HMRC on the 'Tax Gap' as a measure of their 'efficiency'. The original IR35 was supposed to collect £200m a year but probably collected less than that in total. Now HMRC can point to 'increased compliance' in the public sector which conveniently enables them to close the 'tax gap' - a figure which they estimate in the first place. The action against flexible remuneration packages, salary sacrifice, had the same root cause - for many years HMRC had left it alone as a 'commercial decision' in the words of their own guidance. Why change now? Because one of the root causes of the tax gap is revenue giving reliefs whether overt or by tolerating commercial practice. The revenue's own tax gap figures (https://www.gov.uk/government/uploads/system/uploads/attachment_data/fil...) clearly shows that in their opinion the biggest sector contributing to the tax gap is - the SME, the biggest tax sector figure is IT and NIC and the amount lost to 'failure to take care and legal interpretation' is 7 times greater than the amount lost to avoidance. So the greatest return to HMRC is to continue to soak the SME sector for IT/NIC - after all the rationale of Making Tax Digital was to force SMEs to use electronic data records removing the ability to inflate expenditure by estimated figures. Perhaps we should be asking for the OBR to take over the task of measuring the tax gap as, at the moment, the revenue's preferred method of measuring success which is calculated by - HMRC themselves...

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By lme
to Paulsoper
04th Dec 2017 16:51

Not sure how the tax gap can be down to SMEs with so much avoidance by the likes of Apple, Starbucks, Amazon etc and the act it does not seem to be policed?

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30th Nov 2017 10:41

How will the average end-client know the new rules? If (say) an architect's firm hire a freelancer limited company directly, then they will probably just pay on invoice as with any other supplier. It's one thing for Public Sector bodies to know the rules, but the average private sector business will never have heard of IR35.

And if such directly contracted companies are let off, and only freelancers going through Agencies are affected, then maybe Agencies will just charge a finder's fee to the end-client and let the freelancer be paid directly by the end-client.
I guess this will all come out in the consultation, but I think the private sector won't take this lying down.

Also, we all know HMRC has limited resources. It will only take a few Agencies to take a chance with the law, in an effort to attract the best contracts and freelancers, and the others will feel obliged to follow or to see their businesses fail. Every accountant is familiar with the client who says "my mate gets away with it so why can't I?".

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