Is IR35 roll-out to the private sector inevitable?

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The freelance sector is anxiously waiting as Mr Hammond prepares for his Budget on November 22nd.

There are strong hints that the IR35 reforms that came into effect in the public sector in April will be rolled out into the private sector, perhaps as soon as April 2018. This is in spite of the devastation that the changes have caused to the public sector, particularly the NHS.

recent ContractorCalculator survey found that 71% of public sector projects that had been using contractors had been delayed or cancelled since the reforms went live.

There are countless compelling arguments opposing a private sector rollout, but many worrying signs that it might be inevitable. Dave Chaplin is CEO and founder of online contracting site ContractorCalculator. Here is his take on some of the reasons why the private sector might be hit and some reasons why the Government might pause for thought and reconsider.

Reasons why the IR35 reforms will hit the private sector

  • A two-tiered system is crippling: 98% of the contractors ContractorCalculator surveyed said they won’t work in the public sector again unless they are able to work outside IR35, or if the Government pays the extra tax.
  • The public sector is struggling to hire contractors: Projects are being delayed and even cancelled as a result. Many of those that are able to hire contractors are being charged premiums of at least 25%.
  • A solution is needed before Brexit: The Government will be eager to address this imbalance before Britain leaves the EU. A private sector rollout may be seen as a quick and simple solution.
  • HMRC’s tax target has not been met: HMRC claims IR35 non-compliance costs the Treasury £400m each year, but only expects the partial reforms to yield £45m over the next two years. Where will the remaining tax come from?
  • HMRC is in denial about the real impact: Despite mounting evidence proving that the reforms have been calamitous for project delivery and particularly health services, the taxman denies that there have been any problems.
  • MPs are ill-informed by HMRC: HMRC’s job is to raise money for the Treasury. If the taxman tells the Government that the public sector reforms were a success, a private sector roll out is likely to get the go ahead.
  • The Taylor Review supports HMRC’s arguments: The taxman often promotes IR35 as a mechanism to eradicate false self-employment, protecting the vulnerable workers the Taylor Review concentrated on. This argument could be used to force through a private sector rollout.

Reasons why the IR35 reforms won’t hit the private sector

  • Huge business backlash is likely: Proposing a private sector rollout would spark a furious response from contractors and business as a whole.
  • The Government is weak: Without a majority to rely on, it may be considered unachievable for the Conservatives to get a private sector roll out through Parliament.
  • The fear of crippling the flexible workforce: The Tories have an underlying policy that any job is better than no job. The evidence so far should persuade them that private sector changes would result in a loss of jobs.
  • Government needs to consider reviews: There have been countless reviews into employment status of late – they can’t go ignored. The Government at least needs to evaluate responses to the Taylor Review before considering its strategy and next steps.

One of two possibilities

Over the last 18 years there has been considerable misjudged and damaging legislation heaped on the contracting sector and the sensible option would be to repeal the IR35 reforms altogether. A two-tier system is of course also wrong. However, repeals rarely happen, and neither the Government nor HMRC are in the habit of admitting when they have made a mistake.

So, I think there are two possibilities. We will see HMRC and the policy makers go full steam ahead and announce a rollout in April 2018. Or Government will relax the stringent application of the IR35 reforms in the public sector for a year whilst 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, UK plc. and the UK economy overall.

About Dave Chaplin

Dave Chaplin

Dave Chaplin is a former IT contractor in the City of London, and is founder and CEO of ContractorCalculator, and author of the Contractors' Handbook and Beat IR35: The ultimate guide to IR35 for contractors, agencies and clients.

Started in 1999, ContractorCalculator.co.uk is the leading independent website for the UK contracting industry – most of whom are highly skilled knowledge workers.

Dave Chaplin has lived and breathed contracting since he first took the plunge and became ‘one of the chosen’ in 1997. He spent seven years working as an IT contractor in the City of London on critical, cutting-edge IT infrastructure and development projects for global players like HSBC, Merrill Lynch, Cable and Wireless, and many others.

 
 

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08th Nov 2017 16:02

The private sector wont just roll over and assume IR35 applies to each and every contract as has occurred inside the public sector. We don't have a single client left on a public sector contract.

The most likely result is they will take a punt on it safe in the knowledge HMRC don't have the resources to hit them.

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09th Nov 2017 12:35

Inevitably, yes I fear.

Less of a roll-out, more like toxic waste falling off the back of a lorry and seeping into the drains!

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12th Nov 2017 16:15

The problem then becomes the fact that many businesses will not want to take contractors on as employees so, whereas you might assume that these changes spell the end of one man band contractor companies, in fact they will still be in demand but the negotiation as to contract price will become rather more heated.

Surely the issue is separating short-term contracts from longer term contracts? Longer term contracts where contract A moves to A+ moves to A+++ dodging the rules with clever contract wording should be the target but three-six month assignments being hit as well? In my opinion that will just cause an initial rush to take the PAYE roles followed by a demand -v- supply price change as the pool of contractors constricts and the tax ends up getting passed to 1. the business engager and 2. their customers.

In the real world business wants the ability to hire and fire at will depending on the contractors performance - easy to do with a contractor but try to do that with an employee! Warning 1, warning 2, final warning - risk of wrongful dismissal claim etc etc - many might prefer to pay the contractor a bit more to remove that problem.

Surely just the existance of the fact that the client could just dismiss them is an indicator of independence and risk, and the fact the genuine independent contractor would accept that is evidence of it? I don't recall ever seeing such a direct question on the employment status indicator tool?

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12th Nov 2017 18:51

These contractors will still want to work somewhere. It's one thing refusing PS work as they still have lots of alternative customers, but if the banks etc also applied IR35, there are fewer and fewer options for contractors wanting to avoid it. If all contracts from major firms were liable to IR35, then contractors would have a different choice - employee or IR35.

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13th Nov 2017 10:15

I am not so sure that contractors have no options. It is easy for HMRC to beat the public sector and for it to lie down and accept it.

The private sector is many different businesses some small and some large. If this proposal is introduced I can see that work will be moved offshore maybe to places that dont have such a silly regime - silly because it creates different classes of workers but expects the same rates and reliefs to apply to all.

Small employers will negiotiate with contractors either to have a job charge rather than a hourly or daily rate or as mentioned above just ignore it even to the point that the contractors invoice will refer to professional services and no comment as to hours or rates per hour.

@Ken please note that many contractors dont have the option of IR35 or employee, just as they dont now.

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By NeilW
13th Nov 2017 10:20

Sensible lobbying would convince the government to apply this to large companies only - exempting SMEs. After Brexit those as the sort of firms we want anyway - ones that are rooted in the UK.

It is pretty clear from the calls I've had in the last few weeks that large operators are treating employees and freelancers in exactly the same way - leading to an inevitable IR35 conclusion. And they are doing that because there is no pain for them in behaving in that way. Forcing them to be liable for the IR35 tax would concentrate the mind - particularly in a tight market for talent.

It is the behaviour of large often international operations wanting disposable employees that is the problem - as we can see with the Uber debacle. That needs to stop. Either we have employee protection or we don't.

And really the tax effect should flow from the employment law consequences, not some tax based hack. Why are employment agencies allowed to sit in the way of the true relationship for employment purposes?

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By mojocvh
to NeilW
13th Nov 2017 12:50

If it leads to the abatement of agencies that retain 62-75% of the clients fee, then BRING IT ON!

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13th Nov 2017 10:25

As far as I can see the problem is not IR35 but the nature of the contracts. If the bodies using contractors used them as self employed service providers instead of tying them down to contracts and work practices that were essentially employment contracts, then IR35 would not apply. Using contractors in many cases has become a means of employers avoiding their responsibilities and payment of National Insurance, which should be funding the NHS and State pensions. Genuine contractors in business on their own account should not be affected. Before corporation tax rates made using a company tax effective, businesses were always having arguments with HMRC about whether a person was employed or self employed and large companies usually took the easy option and applied PAYE to save any argument later.

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13th Nov 2017 10:58

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.

I don't buy any of the reasons Put forward above as to "why IR reforms won't hit the private sector". I don't believe the Gov actually sees small businesses - they are simply not on their radar, except maybe as a source of revenue.

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By cfield
13th Nov 2017 11:07

The most likely outcome is that work will be outsourced to consultancy firms rather than individual contractors, who will then have to work for those firms or, better still, show some real entrepreneurship and band together with other professionals to form their own boutique consultancy firms.

I can also see a lot more use being made of the online status tool, which for all its faults does put you outside IR35 if you can honestly say you control the work or appoint a substitute. OK, the latter is unlikely but not the former. If you can get the client on-board, the taxman will find it impossible to challenge your answers and have no choice but to stand by the results in line with their guarantee. I wonder how long that will remain!

The public sector shied away from using this tool as they thought they could get away with blanket policies. They are paying the consequences. I think the private sector will be a much tougher nut to crack.

There will be no "holding the line" as the NHS expected their trusts to do in standing up to locums. Any private sector firms who try to wash their hands of this as the likes of TFL tried to do will lose good staff to firms who don't.

I don't expect any of this to cut any ice with politicians and civil servants. The roll-out to the private sector will probably go ahead anyway. It's what always happens when ideology and PR get in the way of common sense.

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13th Nov 2017 11:23

So what will the average contractor do if it is rolled out to the private sector? Pack in lucrative contracting that pays £500 pd and get a full time job on a smaller salary with full NI and taxes to pay? Give up contracting and become a sole trader freelancer earning a pittance (which most do - barely above minimum wage equivalent) compared to well paid contracting? The only reason these contractors are jumping overboard from public sector work (since IR35 inclusion was mandatory for the public secor) is precisely because they have a private sector to fall back on. Once that option is removed, they are stuck. They will roll over. They will have to choice but to 'do or die.'

And why shouldn't they too? Most of the contractors bemoaning the new regime wouldn't know 'risk' if it bit them on the backside or true freelancing independence where they make their own rules. They do the same jobs as their full time colleagues doing similar work too - who are paid far less in salary and have to stick to office like discipline and rules. Anyone that says different is either a liar or needs psychiatric help.

It is inevitable this was going to happen. And didn't the PCG (or whatever it is called now) fight to abolish IR35 once? Well, this change is the equivalent surely because IR35 will all but exist in name only and strictly apply to those who don't work the same way as contractor one man bands in IT and only apply to those starting up a genuine consultancy with an eye for growth and staff and tendering for their business. A true business.. as HMRC would call it.

To do otherwise is a darned insult to freelancers who do compete for work without agency intervention, do take risks, can't rely on even being paid at all - never mind on time - and when they do they don't see the same kind of returns. Don't they deserve a hearing too? Isn't that what the PCG (or whatever it is called now) were promoting - a harmonisation of all one-man-bands under the label : freelance? Something, I personally opposed during my glory days as a consultant working alongside those that this legislation most affects.

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By cfield
to BelGrant
13th Nov 2017 11:49

BelGrant wrote:

The only reason these contractors are jumping overboard from public sector work (since IR35 inclusion was mandatory for the public secor) is precisely because they have a private sector to fall back on. Once that option is removed, they are stuck. They will roll over. They will have to choice but to 'do or die.'

Too simplistic. You're thinking like a politician. The private sector is not one homogeneous mass. It is made up of independent competing firms with an eye for business. They will not all behave the same and they will not roll over if it threatens their bottom line.

The public sector managers didn't much care if their contract staff left or demanded higher fees as a) they still got their salaries at the end of the month and b) it was more than their jobs were worth to oppose the edicts coming down from above or to think of solutions. Private sector firms will take the opposite approach.

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to cfield
13th Nov 2017 21:35

Since when has an 'independent IT contractor' been a 'firm?' They work through a limited company payment vehicle as a one man band to avoid NI contributions? They rarely work in partnerships of any kind.

I disagree with your assertion that I think like a politician. But the private sector hirers have done and for far too long in my opinion. For those highly paid 'contractors' who they deem business critical who can't afford to lose - the IT architects, project managers in the run up to cost-timeline dependent milestone (irrespective of what their actual working practices are) they are willing to 'turn a blind eye' and promote them and structure the upper contract with the agency to look as much 'outside IR35 as possible - all artificially of course - just to retain them even when, in reality, they were working 9-5 and eating in the subsidised canteen. For the rest of the project team - those 'nice to have' contractors, often on lower rates - even if they could and even did or could genuinely dopt working practices that alluded to type of 'independence' HMRC insisted upon in their guidelines, the big bad boss would screw them rotten over their IR35 status even before they started working for them because these types of contractors can always be replaced if they kick up a fuss - with few ill effects. I should know, I was one of them.

That is why IR35 is and was always unfair. That is why the homogenisation of all 'contactor' one-man-bands for tax purposes was an inevitability all the time these one man bands fought and often won to keep the status quote with endless consultations, white papers, cozy chats with political sympathisers (i.e., to keep nice cozy employee like arrangements on regular pay, often for years on end, but still paying themselves no NI and minimum wage. What these contractors should have done was actually fight for the type of genuine freelance-like working practices that justified being outside IR35 in the first place (something the PCG never fought for or even recognised - except me!) So when the heat was on, and the Government started to take a good hard look at how to tackle this millstone around their neck HMRC said, after years of legal battles with losses, stupid arguments, mandatory tests to gauge tickbox status - non of which worked - if Mohammed won't go to the mountain, the mountain will go to Mohammed. If contractors can't or won't work outside IR35 to justify keeping their outside IR35 status, we will ensure IR35 is diluted first, disallowed in one sector next and then for all contractor one man PSC bands eventually, signalling the stealth demise of this ludicrous tax aimed at an even more ludicrous self-indulgent IT sector who expected to eat cake and have it too.

That, my friend, was the result. Why anyone would believe that anything other that real business like behaviour and practices would be deserved of real business like tax perks, I will never know. The rest of the business world doesn't think like that, so why should contractors be a special case?

Can anyone answer that? Nope.

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to BelGrant
13th Nov 2017 20:15

Bel, you write a lot of sense and obviously are more aware of the true nature of iT contracting and its market.
I wouldn't go so far as to say that those who say differently are liars or need psychiatric help, but I do think they are either uninformed or deluding themselves. The IT contracting market is simply one of supply and demand. Generally, contractors cost and earn more than employees but are seriously cheaper than consultants from consultancy firms. The hiring model for contractors via recruitment agencies is an easier, faster, more efficient and cheaper model than the selling model used by consultancies. A consultant's target utilisation rate is generally much lower than a contractor's. Contractors are much more likely to become employees than set up a consultancy.

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13th Nov 2017 11:27

There is only one answer and that is to get rid of PAYE and NIC. Everybody is self-employed and work under the same rules. Too easy isn't it.
So HMRC, let's carry on destroying the small business so that you only have to negotiate a tax bill with the big boys.

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13th Nov 2017 11:38

When the tories were in opposition they made several
loose promises to withdraw IR35 and led people to believe that it would be, but as is usual when in power they did not keep their word.
It has been a contentious matter for far to long affecting the flow of business in the UK and is now causing yet more damage to our economy and should be withdrawn to allow small businesses to flourish.

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13th Nov 2017 12:21

Is the leaking of this suggestion pre-budget spin? Brief something really vile, then the actual announcement (say increased IT rates on dividends + further restriction on divi nil rate) doesn't sound too grim.
Collective sigh of relief but everyone has been suckered into accepting the hike.
Governments do have a lot of form for this.

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13th Nov 2017 13:09

Issue
Much of the issue with IR35 is that the trade unions want employee rights for workers.

Background
Typical workers want worker's rights and a decent wage ie the engagement is 'Employment'.
Typical contractors want self-determination and so extra money instead of employment rights. ie the engagement is 'Self-employment'.

Engagement Misunderstanding
If the client and the worker believe that the engagement is the same then both are happy. PAYE happens OK or invoices are paid. Bliss.

The issue occurs when the client and the worker have a different understanding of the engagement:

Client believes employment - worker believes self-employment
This is unlikely to last for long, because if the worker raises an invoice the client will not pay and so the engagement terminates.

Client believes self-employment - worker believes employment
It may not be obvious to the worker that this engagement is happening. This is because the worker receives remuneration for the work done and so is happy for a time. However at some point the worker becomes aggrieved (eg no holiday pay or sick pay etc). The worker demands worker's rights. The worker involves a trade union who then backs the worker and IR35 case law is strengthened.

Misunderstanding Consequences
The problem is that the trade unions are pulling towards provision of worker's rights and the self-employed are are pulling the other way.
HMRC prefer PAYE so the trade unions are helping them. HMG want individuals to vote for them and so backing worker's rights is the moral thing to do.

Realisation
We need to separate the 2 segments of work force.

Solution
All self-employed work needs to be remunerated via the worker raising an invoice and the client making the payment. Then the worker knows that they are self-employed and the client knows that the worker understands this.

If the worker does not raise an invoice and is remunerated then the arrangement is employment. This can be determined quite simply by the client making an initial payment of £1 to the worker at the start of the engagement.

Outcome
The result is that there is no misunderstanding of the arrangement.
If a worker is employed and is not treated as such then the trade union should fight for the worker's rights.
If the worker is self-employed then breaches of the engagement are pursued through commercial processes.

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to drakeltd
13th Nov 2017 13:56

I strogly believe that there should be no difference in workers rights. These should be determined by OUR Government in consultation with relevant bodies and applied at every workplace. When you do away with PAYE, employment status problems become a thing of the past. The staff at HMRC operating PAYE could easily be moved to investigating expenses claims. Everbody is allowed to claim expenses to do with their work and they just pay a basic rate of tax after PA. Limited Companies pay the same rate.
If the Government are worried about cashflow then they can set up a system wherby tax payers can pay on a monthly basis including Limited Companies.

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13th Nov 2017 16:40

We have already seen the attempt by the NHS to apply a blanket policy (employee) to all. It led to locums deciding to go on holiday or to the private sector and the cancellation of operations and routine out patient care. Within a few months, we saw "innovative" new ways for the NHS to bring those locums back.

I predict that Megabank Plc and Monster Insurance Plc will not wait as long as the NHS and should IR35 be extended, for "innovative" ways to be found pretty quickly that allow for the status quo to be maintained.

Such use of innovation will then inevitably be claimed to be tax avoidance and HMRC will look to collect, fines and penalties along with the tax, but not until they have caught up in say 5 to 8 years' time.

It really all comes back to the fundamental question of why HMRC wants to destroy the contractor economy that is worth billions?

Do they really think that all contractors are tax avoiding types with money stashed away out of sight? Try maintaining that position when the individual in front of you is a social worker who was made redundant, told that they had to use a "scheme" in order to continue to work for the authority, was told to reapply for a permanent position once the authority budget was restored, now has an enquiry, is being told again that redundancy is imminent, repeat.

I've never seen one reason that makes any sense from HMRC as to why they follow this strategy.

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13th Nov 2017 21:16

It's History repeating itself
Just look back to the Construction Industry Scheme for how this is going to play out...

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14th Nov 2017 10:00

This is an interesting thread for several reasons. IR35 has applied to the private sector since its inception to counter issues with people cancelling contracts of employment and replacing them with self employed contracts which avoid NIC and income tax to a degree on what is essentially the same relationship as was previously held as employment . The tightening of the rules prompts uproar - so why is this avoidance more palletable than large companies using ineffective cross border tax rules to pay less CT ( bearing in mind that one has more of the hallmarks of avoidance than the other in my view!)

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to AmandaElliott
14th Nov 2017 10:22

Amanda it's not just IR35, it's HMRC (since Gordon Browns days) determination to get the small self-employed (including one man band Ltd Cos) onto PAYE to get more money. This is a very short sighted application. There is an old saying which is very true. A happy worker is a more productive worker, therefore more earnings - more tax. HMRC have lost the plot really. They do not trust the SE nor do they trust agents, So we have this utterly ludicrous situation and by the looks of things it will only get worse.
HMRC should be investigating and collecting and leave employment status to the market place. As for the big boys, well until the world decides how to deal with the taxation of multnationals they will continue to pay what they want.

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15th Nov 2017 12:18

There a fair number of comments on this thread some I can agree with and others....

Merging NIC with income tax. This would mean that all pensioners and investors in companies would be liable . Not sure that this is a goer if you want to remain in power.

Contractors = Employed Workers. I dont think this has been thought out. Dont forget civil servants are employed workers and so have a vested case. The only problem is that many contractors dont like having one boss to tell them what to do and when. Some want to have more than one contract and work more than 35 hours per week. Thus I am saying there is not a one-size fits all.

The problem as I see it is that HMRC can only see ways of raising taxes without looking at the negative effect ie what is the cost to the country.

Finally the root of the problem is to try and fit all people into the same size box.

The Country is spending more than it can afford but until a chancellor does something about this - not by tinkering but by major reform it will continue.

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16th Nov 2017 21:47

A lot has been said and some very good comments, but in the end I can't help but think that the government's biggest mistake is believing that every contractor is inside IR35.

It is not beyond the realms of possibility for someone to setup a consultancy to educate and explain to private companies/businesses how they can ensure their contractors are outside IR35. One just needs to study test cases and advise. The contractor would of course need to compile a file to make sure there is regular documentation of their outside IR35 activities.

Frankly, the government has resorted to looking in the back of the sofa for loose change, as that's all they'll get here.

Industry has got far too used to having a flexible expert contractor base to change. At a time of Brexit, this government have got used to shooting themselves.

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