IR35 Disaster Looms as Chancellor Resigns

19th February, 2020
By 19. February 2020Finance, IR35
IR35 Disaster Looms as Chancellor Resigns

The news of Sajid Javid’s resignation last week came amid rising disquiet from the contracting sector. Only the day before, off-payroll protesters had gathered outside parliament to demand an end to “zero rights employment”.

The off-payroll reforms scheduled for April are already causing havoc in the private sector, where unprepared businesses are forcing PSC contractors onto the payroll so that they won’t have to assess them. These controversial actions have met with outrage from contractors, who are being taxed as employees without any employment benefits.

Chief among protesters’ demands was a call for Chancellor Sajid Javid to pause the changes so that a less damaging alternative to the notorious IR35 rules can be found. A delay would also allow proper time to consider the results of the IR35 review due to conclude this month, and the recently announced House of Lords investigation.

It seems Javid was embroiled in bigger problems, however, as he resigned his position as Chancellor less that 24 hours later following a disagreement with the Prime Minister over his advisors. With Javid set to deliver the first post-Brexit budget in just four weeks time, his departure doesn’t bode well for contractors’ hopes of an off-payroll reprieve.

It was Javid who called the current review into the off-payroll rules as part of the conservatives’ pre-election manifesto. Given that Javid himself was sometimes accused of having an inadequate grasp of the reforms and the issues surrounding them, his successor has a lot to grapple within a very short space of time.

Javid is succeeded by Chief Secretary to the Treasury Rishi Sunak – who just seven months ago was a junior housing minister. Sunak backed both Brexit and Boris Johnson, indicating that he’s one to go with government policy, rather than against it. Given that the March budget was intended to chart a course for the new government at this critical time, Sunak’s relative inexperience isn’t ideal.

The rest of the cabinet also received a reshuffle, with the Prime Minister evidently doing his best to close ranks against any dissenters as the UK enters a new era.  Yet the new cabinet will have their work cut out. Economists forecast a 30% chance of recession this year, with Bank of England calculations suggesting that the sluggish rates of economic growth will leave the Chancellor with a £12bn deficit by 2022-23, instead of the £5bn surplus laid out in the Conservative’s election manifesto.

The Treasury declined to comment on the calculations. However, shortly before his departure, Javid spoke of wanting to “turbocharge” the sluggish economy. This creates an obvious conflict for the Conservatives, the supposed party of business, whose policies are set to seriously dent the British workforce. Not only is the rise in trade barriers as the UK leaves the EU projected to weigh on productivity growth, recent research revealed that up to a third of UK-based EU nationals are yet to secure UK settled status.

With recruiters facing losing many EU workers off their books and mass business uncertainty, it’s difficult to see how the off-payroll reforms could come at a worse time. Businesses need access to skilled workers and in a period of economic uncertainty the ability to scale up and down. The temporary skilled labour force has provided British business with this in the past. The reforms are heavily compromising this flexibility, and expansion plans are either being shelved or offshored.

An independent survey suggests that the UK is facing a £2.2 billion productivity gap in the first half of 2020, as workers leave contracts in response to blanket PSC bans. Although it’s difficult to separate spin from definitive fact, the latest figures emerging from contractor polls are alarming. According to research released last week by IPSE, around a third of freelancers say they’ll stop contracting in the UK due to IR35 changes.

While some plan to take their skills offshore, others are reportedly planning on taking a sabbatical to ride out the reforms, or even on taking early retirement. While it seems doubtful that all but top-earning contractors could afford to take themselves off the market for long, even six months could mean the difference between the government securing new trade deals, or losing them for good. There’s also some irony that the point of an exercise intended to increase tax revenue could result in people taking themselves off the work market, and therefore out of the tax system altogether.

The fact is many contractors simply can’t afford to make up the deficit in their earnings by going inside IR35 in the long term. An outside IR35 contractor who’s required to work away from home during the week can claim travel and accommodation expenses. These contractors typically have in the region of £1,000-£1,200 expenses a month. Under the new rules, if they’re engaged under IR35, they’ll have to pay these expenses out of their own pocket, along with a 25 percent increase in taxes, unless the end-client agrees to new rates of pay.

A recent survey also showed that 91 per cent of the contractors who took part don’t trust HMRC not to start retrospective tax investigations if they accept an ‘inside’ IR35 status on their current contracts. This, combined with the financial hit and a worryingly subdued demand in sectors like IT, is leading many contractors to consider their options. Almost 45% of contractors remain unsure if working via a limited company or an umbrella company would be best for them, with many left feeling that they don’t know where to turn for IR35 advice.

Although some remain hopeful that the recent political reshuffle will put off the reforms while the new cabinet gets to grips with legislation, this seems unlikely. Now, more than ever, Johnson seems determined to push ahead with planned policies with little time for caution. While contractors must weigh up their long terms options, in the meantime they’re advised to ready themselves for reform.

This content has been supplied by IR35 Guru.

At ContractingWISE we can offer you an IR35 solution to suit your personal circumstances. We have access to an excellent range of specialist umbrella companies, and can also help you with suspending or closing your limited company, depending on your situation. If you’ve been affected by the IR35 reforms and feel unsure about your position, get in touch with us and we’ll talk you through your options. To talk to a member of our team, call: 0203 642 8679