The Chancellor’s budget announced that off-payroll rules will hit the private sector in 2020. Amidst uncertainty over Brexit, there are widespread concerns that the reforms will damage business and weaken the economy at a critical time. ContractingWise takes an overview of the off-payroll developments to date.
For many contractors, news that the off-payroll rules will be extended to the private sector in April 2020 will come as an unwelcome confirmation of their worst fears. Ever since the new rules were rolled out to the public sector last April, the ensuing problems have created a year of upheaval and unease for contractors working through their own limited companies. Although the Chancellor’s announcement gave contractors a brief reprieve from a possible 2019 roll out, feelings persist that the government continues to fund some of the giveaways in other areas at the contractors’ expense.
Introduced last year, changes to the tax rules known as IR35 are aimed at contractors working through personal service companies for the purpose of paying lower taxes. In order to prevent widespread non-compliancy, which reportedly costs the exchequer £1.3bn a year, the government believes that many contractors should be reclassified as employees. In a bid to address supposedly lost tax revenue, Chancellor Philip Hammond made public sector authorities responsible for checking the contractor’s employment status and deducting the correct taxes; this will also apply to private sector firms with more than 250 employees from 2020.
While the government claims that its aim is to equalise the amount of tax paid by contractors and permanent employees in the name of a ‘fairer tax system,’ they have consistently demonstrated a lack of understanding when it comes to the contracting sector. Unlike employees, contractors work without the security of receiving statutory benefits, pension provisions or a guaranteed wage packet every month, while also meeting the administrative cost of running their own limited companies. Of course, HMRC would argue that it’s precisely this level of risk that IR35 attempts to establish, thereby justifying their constant refrain that ‘the reforms will not affect anyone who is genuinely self-employed.’ This claim isn’t supported by the upheaval caused by off- payroll reforms in the public sector, where blanket rulings saw contractors forced to go onto umbrella solutions or leave the sector for good.
Nor is it supported by 75% of recent IR35 tribunals, where HMRC found themselves on the losing side. Although few would dispute that a small minority of workers attempt to have their cake and eat it, the tribunals clearly indicate that HMRC is out of step with the increasingly diverse nature of Britain’s workforce. The government’s oversimplified interpretation of employment law, as demonstrated by their highly criticised self-assessment tool, is often conflicted and confusing for contractors attempting to navigate their way through the new legislation. Instead of providing genuine guidance, HMRC and CEST have often provided highly selective or insubstantial interpretations of IR35’s key determinants (substitution, obligation and control), leading many to question their motivations.
Elsewhere in the budget, the government showed an eagerness to encourage enterprise with increases in the qualifying period for entrepreneur’s relief and reduced business rates for small businesses. However, extending the off-payroll rules to the private sector will place an additional 10% onto the cost of hiring flexible workers for growing businesses, doing little to aid the innovation and productivity that could play a vital role in a post-Brexit economy. Chris Bryce, CEO of the Association of Independent Professionals and the Self-Employed (IPSE), said:
“The self-employed contribute a staggering £271bn to the UK economy each year, and give the country one of its greatest competitive advantages – flexibility.”
“It’s a short-term tax grab that will do lasting damage to the economy by taxing out of existence the smallest and most agile businesses.”
“These are the very businesses that the government and large corporation will need to call upon to provide the specialist skills to navigate our way through Brexit.”
Many financial experts warned that the reforms could undermine the availability of the UK’s flexible workforce, leading to rising costs in the private sector as businesses struggle to recruit contractors from a shrinking talent pool. Research by contracting bodies shows that a staggering 98% of independent contractors would avoid working on contracts that placed them inside IR35 if the tax reform was enacted in the private sector. Faced with the prospect of being wrongly re-employed on higher taxes without any of the benefits that full-time employees enjoy, many contractors will simply raise their rates or decamp to European business hubs where conditions are more favourable.
But the practical implications of the change will be of more immediate concern for private sector HR departments, many of whom will need to invest considerable time and effort in classifying and communicating with their contingent workforce. Businesses will need to invest in significant developments to their IT infrastructure in order to process off-payroll invoices, in addition to acquiring considerable IR35 expertise in order to address the diverse private sector market. Since it’s unlikely that contractor consultants will be in a position to provide this service, businesses are being advised to allocate off-payroll training to designated staff.
Although HMRC has steadfastly maintained that the reforms have improved compliancy, unanimous feedback from tax experts, economists and financial bodies indicates a catastrophic impact on the public sector. With the results of its consultation process still pending, the government will need to address the overwhelming unpopularity and concerns over the new reforms before extending them to the private sector in 2020. At over £1bn, the proposed measures will raise more in one year than any other measure in the budget, but with warnings of the unmanageable burden that the rules would place on UK firms and the expected crippling impact on labour market flexibility, the question remains: at what price?