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IR35 reform finally hits the private sector

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Over two decades since it was first dreamed up by then Chancellor Gordon Brown, the IR35 reform finally rolled out in the private sector today (6 April). 

6th Apr 2021
Editor AccountingWEB
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The introduction of the IR35 in the private sector will affect thousands of the UK’s independent workforce, with AccountingWEB members reporting that these clients have been “dropping like flies” since the reforms were confirmed in the 2018 Budget

The new reforms put the responsibility of assessing employment status on medium and large private sector clients, rather than on the intermediary - the client classed as ‘small’ is exempt from determining the employment status of its workers.  

This caused many companies to pull out of the sector completely. 

The moment banks retreated from the limited company contractor market in 2019 due to the off-payroll working rules was really the smoking gun for PSCs, with banks instead opting to arrange contracts on a PAYE or umbrella firm basis. 

The prospect of today’s reforms led AccountingWEB members to declare last year that “contracting is over for the foreseeable”. But as the rollout becomes a reality, Qdos CEO Seb Maley is confident that this is not the end of contracting: 

“The introduction of IR35 reform is a historic moment. It marks the culmination of years of the government chipping away at contractors, who have shown tremendous resilience and a determination to continue working this way. But while reform poses challenges to contractors and the businesses who rely on them, I am confident that contracting will survive.”

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Replies (28)

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By norstar
07th Apr 2021 10:05

As far as I can see, the tips from Brightpay above are meaningless. We've seen a stampede with any medium/large end client simply assessing everyone as within IR35 then insisting they provide services through an Umbrella or go through a PAYE agency - regardless of the facts.

The baby has been thrown out with the bathwater and even the cases I thought were watertight and where the CEST tool reported them as being outside IR35, are being forced to accept umbrella structures.

I suppose that's what HMRC wanted but it will be interesting to see the end result of all this.

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By NeilW
07th Apr 2021 10:12

Why are umbrella structures so much better than the employer just being required to employ what is their employee?

We're seeing this across the corporate world. Employees increasingly employed by employment businesses, not by actual businesses.

It's no longer tax avoidance that's the issue; it's employment avoidance.

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Replying to NeilW:
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By Rgab1947
07th Apr 2021 10:35

Employment avoidance is something that was on the cards many years ago when "workers rights" became so onerous everyone tries to not employ people.

The moment I could I sold my business and am happy being on my own. I call in bookkeepers who are self-employed if I need work done that I cannot or will not do.

I think contractors are having their freedoms taken away. They cannot be employees with all the "workers rights" but neither can they be self employed to work as they wish. Full or PT, flexi or take 6 weeks holidays.

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Replying to NeilW:
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By flightdeck
07th Apr 2021 10:43

Yes - that is an interesting way to look at it : "employment avoidance". I shall cogitate on that.

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By tonyaustin
07th Apr 2021 10:31

There is nothing new in the tips from Brightpay. They are what everybody advising on employed v self-employed has always advised. It is how contractors such as solicitors, accountants and architects operate with their clients. The problem seems to be the clients. They do not seem to want contractors on those terms. Some have been benefiting for 2 decades on avoiding PAYE and NIC by having employees use limited companies and carry the IR35 risk. Now they either have to employee their employees or get an umbrella company to employ them. Unfortunately, contractors using PSC's appear not to have complied with IR35 when perhaps they should. Because HMRC have never manage to enforce IR35 properly, the problem has continued until, as far as HMRC is concerned, it has become unmanageable. Needless to say, a number of contractors who would be treated as self-employed if not using a company are maybe now going to be taxed wrongly, as if they were employees, because the clients are not prepared to take the risk and it is the clients who have the purchasing power to dictate the terms.

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By cereus77
07th Apr 2021 10:40

Deeply unfair legislation, disingenuously described as levelling the playing field when in fact it does the opposite. Taxing contractors as if they are employees, removing the possibility to claim expenses and the ability to spread income over lean years whilst at the same time providing none of the benefits or security of employment.

It’s also not so easy to just change to a permanent job for many contractors as this depends very much on your location. If you are in London and work in a high demand area then perhaps not an issue but if you live in the provinces, have a skill set which is not constantly in demand but is more geared around projects, and have been used to travelling to different contracts around Europe you are now in a difficult position. The perfect storm with Brexit at the same time raising barriers to working outside the UK.

A new low for HMRC and the governments which have pushed this in my view.

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By Red1960
07th Apr 2021 10:48

I've got to ask whether reform is really the right term to use here.

It seems to infer some form of progress which is just not justified.

If IR35 has demonstrated one thing recently it has been to expose the inability of many end clients to operate flexibly and intelligently or to adapt to changing circumstances.

If appropriate engagement terms are agreed with contractors and the HMRC "status" tool is applied correctly surely IR35 is not an insurmountable problem.

The alternative is going to be for many talented individuals who play a vital role in the economy to simply emigrate to a country where their skills will be understood and appreciated rather than stay in the UK to be persecuted by HMRC and exploited by the administrators of umbrella companies for a fast buck. The net result will not be posivitive for the UK.

Unscrupulous employment agencies forcing contractors into umbrella companies whilst skimming profits from them through administration and other fees without adding any perceivable value is not a solution, its a problem, and that does add up to reform or progress in any meaningful manner.

Thanks (3)
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By IANTO
07th Apr 2021 10:47

There is already substantial litigation underway where umbrellas have illegally deducted ERS NI from the contractors fees in the public sector. It is envisaged that these cases will mushroom now that the private sector is subject to the rules. Another set of unintended consequences.

I can also envisage an upsurge in employment benefit claims, given recent worker successes in the ET. The financial risk to clients following the umbrella route seems exponentially greater than the risk from HMRC, especially when HMRC can only prove the status of individuals and cannot take a block approach in the FTT.

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By Red1960
07th Apr 2021 11:23

I've got to ask whether reform is really the right term to use here.

It seems to infer some form of progress which is just not justified.

If IR35 has demonstrated one thing recently it has been to expose the inability of many end clients to operate flexibly and intelligently or to adapt to changing circumstances.

If appropriate engagement terms are agreed with contractors and the HMRC "status" tool is applied correctly surely IR35 is not an insurmountable problem.

The alternative is going to be for many talented individuals who play a vital role in the economy to simply emigrate to a country where their skills will be understood and appreciated rather than stay in the UK to be persecuted by HMRC and exploited by the administrators of umbrella companies for a fast buck. The net result will not be posivitive for the UK.

Unscrupulous employment agencies forcing contractors into umbrella companies whilst skimming profits from them through administration and other fees without adding any perceivable value is not a solution, it's a problem, and that does not add up to reform or progress in any meaningful manner.

Thanks (2)
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By petestar1969
07th Apr 2021 11:25

Government and HMRC for many years have been trying to get as many people as possible employed through PAYE. This is the latest attempt.

The employers won't play ball and insist on paying their people through umbrella companies.

This is going to be a nightmare..

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By Crouchy
07th Apr 2021 11:35

The main problem is that there is no referee for the PSC to turn to when the determination is wrong, if they challenge, they are ignored and seen as a trouble maker, there is no one holding engagers to account

There is a total disregard for the facts on a massive scale. Engagers are failing to correctly assess contractors, opting for a blanket approach and forcing them under PAYE / Umbrella's.

we are also just starting to see this with CIS clients as well, its a total mess

The system is unsustainable, engagers would rather pay contractors an extra 30% than apply the rules correctly, it can't go on forever

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By D HILL
07th Apr 2021 11:54

This whole IR35 problem was always going to end up like this because as we all know when hmrc lose a case they simply pick themselves up, dust themselves down and go away and change the laws until eventually they win the day. I can see the argument that why should someone be forced to effectively pay the same amount of tax/nic as an employee but not receive the same benefits such as employment security, redundancy rights etc. You could counter that argument by saying most contractors often charge at a much higher rate than an employee's wage and sometimes having the flexibility that comes from being a contractor can be beneficial to them. Unfortunately as with many things one size does not fit all and some contractors can justifiably feel aggrieved by IR35 but these changes are here to stay so I can see quite a few difficult conversations having to be had with PSC clients explaining the tax consequences to them.

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Replying to D HILL:
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By IANTO
07th Apr 2021 12:12

"we all know when hmrc lose a case they simply pick themselves up, dust themselves down and go away and change the laws until eventually they win the day"

Exactly! This is why I said right from the outset in 1999 that this law needed to be attacked vigorously in order to prevent or at least delay any further detrimental HMRC action.

However, many ignored it as they didn't see it as a threat. HMRC should be opposed at every opportunity and action taken in areas outside of their jurisdiction, e.g. the ET, to limit the effects of their actions. Otherwise, in the words of that famous person -

"and then they came for me"

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By Michael C Feltham
07th Apr 2021 12:34

Quote:
"Over two decades since it was first dreamed up by then Chancellor Gordon Brown,"

Not correct!

The regime was in fact dreamed up by the odious Dawn Primarolo...

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Replying to Michael C Feltham:
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By IANTO
07th Apr 2021 12:48

Dawn Primarolo was part of Gordon Brown's Treasury team. She was the Paymaster General. It was suggested that Timms had put forward the idea after being lobbied by various consultancies who wanted the activities of independent freelancers to be curtailed. However, Gordon Brown had overall responsibility for implementing it.

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Replying to IANTO:
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By Michael C Feltham
07th Apr 2021 14:34

"She was also responsible for introducing the controversial IR35 tax rules which were designed to tax "disguised employment" at a rate similar to employment."

Source: https://en.wikipedia.org/wiki/Dawn_Primarolo

https://www.computerweekly.com/opinion/Fury-at-Primarolo-IR35-stand

I would suggest Gordon Brown could not "Implement" anything; all he could do would have been to add such measures to a Finance Act and await the outcome. Unless the previous FA enjoyed a gap wherein an SI might be sneakily inserted.

Primarolo was and remains a rapid Lefty nut: and hated anyone who could take any advantage of tax codes. Neatly ignoring, of course the earlier 1970s legislation which COMPELLED self-employed workers to incorporate. Which they did. What was then known as HM IR even instructed self-employed workers to incorporate, or be taxed under Schedule E: and their agency to pay employer's NIC and deduct income tax under the PAYE Regime.

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By flightdeck
07th Apr 2021 12:38

Can someone help me please?

I am trying to think of a situation where a worker is genuinely a contractor, isn't a temporary employee and where IR35 negatively impacts them in a genuinely unfair way and why it makes no sense to either the (end) employer or the contractor to be put on PAYE. I'm not trying to play devils advocate or anything like that but there is so much kick-back on here that there must be some really obvious scenarios that I'm just not aware of.

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Replying to flightdeck:
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By IANTO
07th Apr 2021 12:53

Without defining what "impact" really means in this context, I have to bear tax investigation insurance as a result of IR35, which otherwise I might not have needed and I also am required to have my "outside" contract re-assessed, at my expense, every six months. So I could claim there has been an affect on my circumstances, even if you discount the legal actions I've taken with regards to IR35.

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Replying to flightdeck:
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By cereus77
07th Apr 2021 13:51

I suggest you need to think about what you mean by the phrase “temporary employee”.

To me I see employment implying a significant level of job and locational security which increases as time progresses, paid holidays, pension contributions, health insurance and other benefits, no requirement to constantly be on the lookout for new work and general inclusion in the business, the possibly of promotion, training etc.

As a contractor none of this applies; you are a hired hand with short notice and rarely any certainty about the duration of a contract. You are usually identified by your client in all sorts of corporate communications as “external” - generally in the context of “employees only, no externals”. You get no training and there is usually no possibility of advancement - your best hope is a contract extension. These days there is more effort required to get the contracts and usually some unscrupulous middleman taking a large undisclosed cut of the action and getting in the way whenever you want to deal with your client. You often need to travel to get to work and are expected to effectively relocate for the duration of the contract which usually starts with a three month stint and then might get extended if you acquit yourself well and the client doesn’t change their plans. Frequently you end up working for over a year at a client having never had more than a three month extension and so you have had to stay in hotels for the entire period rather than getting a more convenient apartment etc.

Unless you are one of the lucky ones who have a disguised employment contract which goes on for years, it’s a difficult game and HMRC and the government are doing their level best to make it harder every year.

As for the negative impacts I think to an extent these are implied within my answer.

Nevertheless, specifically; contractors are already paying comparable tax to employees as a result of the 2017 dividend tax. Indeed if you are a taking over £100k a year I think you could be significantly worse off from a tax perspective because the dividend tax is not capped unlike the greater part of NI.

However the really unfair aspects of this legislation in my view are that it removes the ability of the contractor to claim any significant travelling expenses for these short term pieces of work and when times are hard and work thin on the ground, these new measures severely impact the ability to regulate your income and tax to optimise the good years and help pay for the bad. Simple example - you earn £100k one year then £20k the next. Before the reforms you could have spread your income over the two years paying a lower level of tax on an average £60k per year. Now you pay top tax in year 1 with no possibility to get anything back in year 2.

I think a large part of the root of the problem is oversimplification and the erroneous belief that a one size fits all solution is appropriate for such a complex business landscape.

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Replying to cereus77:
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By johnjenkins
07th Apr 2021 13:51

When will people learn. There is no such thing as disguised employment. It is a phrase drummed up by HMRC to try and psych people into believing them. There are many such phrases about that are meaningless.

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Replying to johnjenkins:
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By IANTO
07th Apr 2021 13:57

such as

Personal Services Company and
Close Company

neither of which exist is statute.

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Replying to johnjenkins:
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By cereus77
07th Apr 2021 15:11

Their phrase not mine but I can understand that view if someone has been contracting for years at the same client and is treated the same as an employee.

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By johnjenkins
07th Apr 2021 12:52

HMRC can do what they like, if there is a proper contract of services in place and adhered to then they will lose every case.

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Replying to johnjenkins:
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By IANTO
07th Apr 2021 13:00

Agreed, but they are trying to limit the circumstances when a contract for services is offered.

I can't believe that HMRC did not foresee the unilateral actions of major companies who have made blanket decisions and thus made no provision to counter such actions. There are definitely contractors who had a genuine contract for services, who now find themselves affected by blanket decisions.

I'm lucky in that my client adopted the sensible and correct approach of having all contracts professionally reviewed by Qdos.

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Replying to johnjenkins:
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By IANTO
07th Apr 2021 13:46

Agreed, but they are trying to limit the circumstances when a contract for services is offered.

I can't believe that HMRC did not foresee the unilateral actions of major companies who have made blanket decisions and thus made no provision to counter such actions. There are definitely contractors who had a genuine contract for services, who now find themselves affected by blanket decisions.

I'm lucky in that my client adopted the sensible and correct approach of having all contracts professionally reviewed by Qdos.

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By North East Accountant
07th Apr 2021 13:29

This shows how super agile HMRC are.

IR35 has never worked but it's taken HMRC 20 years to come up with something to kill off all the PSC's.

How long for HMRC to twig that the current MTD plans are no good?

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Replying to North East Accountant:
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By johnjenkins
07th Apr 2021 13:45

Eventually HMRC will have to give up trying to control employment status. Whatever they come up with will not work in the long run. WHY? Simply because employment status is a commercial decision. The taxation benefits or not are purely an aside. Quarterly updates for a business that earns over £10,000, says it all.

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Replying to johnjenkins:
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By IANTO
07th Apr 2021 13:55

"employment status is a commercial decision"

I would word that differently. Employment status is a legal condition created by a commercial decision. That commercial decision can create a contract for services, or a contract of service, both of which can be legally determined in the ET and EAT.

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